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Magazine Chapter 7: Production, Costs, and Industry Structure
Q 27.
What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?
Q 28.
What shape of a long-run average cost curve illustrates economies of scale, constant returns to scale, and diseconomies of scale?
Q 3.
The WipeOut Ski Company manufactures skis for beginners. Fixed costs are.Fill in Table 7.16 for total cost, average variable cost, average total cost, and marginal cost.
| Quantity | Variable Cost | Fixed Cost | Total Cost | Average Variable Cost | Average Total Cost | Marginal Cost |
Q31
A common name for fixed cost is 鈥渙verhead.鈥� If
you divide fixed cost by the quantity of output produced, you get average fixed cost. Supposed fixed cost is $1,000. What does the average fixed cost curve look like? Use your response to explain what 鈥渟preading theoverhead鈥� means.
Q33
Average cost curves (except for average fixed cost) tend to be U-shaped, decreasing and then increasing. Marginal cost curves have the same shape, though this may be harder to see since most of the marginal cost curve is increasing. Why do you think that average and marginal cost curves have the same general shape?
Q35
It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.
Q39
A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not need to borrow. Should the firm make the investment? Show your work.
Q 4.
Based on your answers to the WipeOut Ski Company in Exercise 7.3, now imagine a situation where the firm produces a quantity of units that it sells for a price of each.
a. What will be the company鈥檚 profits or losses?
b. How can you tell at a glance whether the company is making or losing money at this price by looking at average cost?
c. At the given quantity and price, is the marginal unit produced adding to profits?
Q40
Return to Figure 7.7. What is the marginal gain in output from increasing the number of barbers from 4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns?
Q42
A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: intensive labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front. To summarize, the method choices are:
Method 1: 50 units of labor, 10 units of capital ; Method 2: 20 units of labor, 40 units of capital ; Method 3: 10 units of labor, 70 units of capital
If hiring labor for the winter costs \(100/unit and a unit of capital costs \)400, what is the best production method? What method should the company use if the cost of labor rises to $200/unit?
