1.) Karma and Don run a furniture-refinishing business from their home. Which of the following represent an explicit cost of the business and which represent an implicit cost?

a. supplies such as paint stripper, varnish, polish, sandpaper, and so on

b. basement space that has been converted into a workroom

c. wages paid to a part-time helper

d. a van that they inherited and use only for transporting furniture

e. the job at a larger furniture restorer that Karma gave up in order to run the business

2.) Suppose you are in business earning an accounting profit of $25,000.

a. What is your economic profit if the implicit cost of your capital is $2,000 and the opportunity cost of your time is $23,000? Explain your answer.

b. What does your answer to part A tell you about the advisability of devoting your time and capital to this business?

3.) Suppose a firm can sell as many units of output as it wants for a price of $15 per unit and faces total costs as indicated in the table below. Use the optimal output rule to determine the profit-maximizing level of output for the firm.

Q TC

0 $2

1 10

2 20

3 33

4 50

5 71

4.) Use the data from the above question to graph the firm's MC and MR curves and show the

Profit-maximizing level of output.

Bernie's ice-making company produces ice cubes using a 10-ton machine and electricity (along with water, which we will ignore as an input for simplicity). The quantity of output, measured in pounds of ice, is given in the accompanying table.

a. What is the fixed input? What is the variable input?

b. Construct a table showing the marginal product of the variable input. Does it show diminishing returns?

c. Suppose a 50% increase in the size of the fixed input increases output by 100% for any given amount of the variable input. What is the fixed input now? Construct a table showing the quantity of output and the marginal product in this case.

6.) Alicia's Apple Pies is a roadside business. Alicia must pay $9.00 in rent each day. In addition, it costs her $1.00 to produce the first pie of the day, and each subsequent pie costs 50% more to produce than the one before. For example, the second pie costs $1.00 x 1.5 = $1.50 to produce, and so on.

a. Calculate Alicia's marginal cost, variable cost, average fixed cost, average variable cost, and average total cost as her daily pie output rises from 0 to 6. (Hint : the variable cost of two pies is just the marginal cost of the first pie, plus the marginal cost of the second, and so on.)

b. Indicate the range of pies for which the spreading effect dominates and the range for which the

diminishing returns effect dominates.

c. What is Alicia's minimum-cost output? Explain why making one more pie lowers Alicia's average total cost when output is lower than the minimum-cost output. Similarly, explain why making one more pie raises Alicia's average total cost when output is greater than the minimum-cost output.

7.) The accompanying table shows three possible combinations of fixed cost and average variable cost.

Average variable cost is constant in this example.

Choice

a. For each of the three choices, calculate the average total cost of producing 12,000, 22,000, and

30,000 units. For each of the quantities, which choice results in the lowest average total cost?

b. Suppose that the firm, which has historically produced 12,000 units, experiences a sharp, permanent increase in demand that leads it to produce 22,000 units. Explain how its average total cost will change in the short run and in the long run.

c. Explain what the firm should do instead if it believes the change in demand is temporary.

8.) In each of the following cases, explain whether the firm is likely to experience economies of scale or diseconomies of scale and why.

a. an interior design firm in which design projects are based on the expertise of the firm's owner

b. a diamond-mining company

Transcribed Image Text:

Choice 1 2 W|N 3 Fixed Cost $8,000 12,000 24,000 Avg. Variable Cost $1.00 0.75 0.25 Choice 1 2 W|N 3 Fixed Cost $8,000 12,000 24,000 Avg. Variable Cost $1.00 0.75 0.25

Answer rating: 100% (QA)

1 Explicit and Implicit Costs These are both classifications of economic accounting Explicit costs entail the direct cost foregone for a good or service mostly quantifiably by monetary value In this c... View the full answer