# 7

## Project Description:

1) define and compare the following types of cost:
a) sunk cost verses incremental cost.
b) fixed cost versues variable cost.
c) incremental cost verses marginal cost.
d) opprotunity cost versus out-of-pocket cost.

3) explain the relationship between a firm's short-run production function and its short-run cost function. focus on the marginal product of an input and the marginal cost of production.

6) define economics of scale. how does this relate to returns to scale? cite and briefly discuss the main determinants of economic scale.

problems

7p3) joe enjoys fishing and goes out about 20 times per year. one day, his wife, sarah, told him that fishing is simply too expensive a hobby. "i think that you should stop going fishing" she exclaimed. "i did a little calculation, and i figured that it costs us about \$28.75 for every fish that you catch because you usually catch about 20 fish per trip. besides, i always end up having to clean them. we would be much better off buying ready-to-cook fish from the local fish market. comment on sarah's remarks. do you agree with her argument? explain. (following below are her cost estimates.)

boat
(cost = \$30,000, usable for 10 years, 20 outings per year) \$150

boat fuel \$45

dock fees and insurance for the boat (average per trip) \$130

travel expenses to and from the lake \$25
(100 miles @ \$0.25 per mile:gas, oil, and tires,
\$0.18, and depreciation and insurance, \$0.70

new fishing equipment purchases this year(prorated over 20 trips) \$25

bait and miscellanous expenses \$50

food \$40

beverages \$35

traffic fine recieved on the way to the lake \$40

total cost of the trip \$575
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7p6) indicate the effect that each of the following conditions will have on a firm's average variable cost curve and its average cost curve:
a) the movement of a brokerage firm's administrative offices from new york city to new jersey, where the average renatl cost is lower.
b) the use of two shifts instead of three shifts in a manufacturing facility.
c) an agreement reached with labor union in which wage increases are tied to productivity increases.
d) the elimination of sugar quotas (as it pertains to those firms that use a lot of sugar, such as bakeries and soft drink bottlers).
e) imposition of stricter enviornmental protection laws.
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