1. What is the relationship between a firm's total revenue, profit and total cost? Give an example of hypothetical data and draw the curves.
2. Define economies of scale and explain why they might arise? Define diseconomies of scale and explain why they might arise?
3. Crumble Corporation produces cookies. Here is the relationship between the number of workers and output (in dozens of cookies) in a given day:
|
Workers
|
Output
|
Marginal Product
|
Total Cost
|
Average Total Cost
|
Marginal cost
|
|
0
|
0
|
|
|
|
|
|
1
|
28
|
|
|
|
|
|
2
|
50
|
|
|
|
|
|
3
|
67
|
|
|
|
|
|
4
|
80
|
|
|
|
|
|
5
|
90
|
|
|
|
|
|
6
|
95
|
|
|
|
|
|
7
|
96
|
|
|
|
|
a. Fill in the column of marginal products. What pattern do you see? How might you explain it?
b. A worker costs $30 per day and the 'Firm has fixed costs of $10. Use this information to fill in the column for total cost.
c. Fill in the column for average total cost. (Recall that ATC = TC/Q) What pattern do you see?
d. Now fill in the column for marginal cost. (Recall that MC = ATC/AQ.) What pattern do you see?
e. Compare the column for marginal product and the column for marginal cost. What pattern do you see?
f. Compare the column for average total cost and the column for marginal cost. Explain the relationship.
4. Consider the following cost information for a pizzeria:
|
Q (dozens)
|
Total cost
|
Variable Cost
|
|
0
|
$ 300
|
$ 0
|
|
1
|
350
|
50
|
|
2
|
290
|
90
|
|
3
|
420
|
120
|
|
4
|
450
|
150
|
|
5
|
490
|
190
|
|
6
|
540
|
240
|
a. What is the pizzeria's fixed cost?
b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also calculate the marginal cost per dozen pizzas using the information on variable cost. What is the relationship between these sets of numbers? Comment.
5. Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs:
|
Quantity of houses painted per Month
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
|
Variable Cost
|
$10
|
20
|
40
|
80
|
160
|
320
|
640
|
Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company?
6. Consider the following table of long-run total cost for three different firms:
|
Quantity
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
|
Firm A
|
60
|
70
|
80
|
90
|
100
|
110
|
120
|
|
Firm B
|
11
|
24
|
39
|
56
|
75
|
96
|
119
|
|
Firm c
|
21
|
34
|
49
|
66
|
85
|
106
|
129
|
Does each of these firms experience economies of scale or diseconomies of scale?
7. Consider total cost and total revenue given in the following table:
|
Quantity
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
|
Total Cost
|
$ 8
|
9
|
10
|
11
|
13
|
19
|
27
|
37
|
|
Total Revenue
|
$ 0
|
8
|
16
|
24
|
32
|
40
|
48
|
56
|
a. Calculate profit for each quantity. How much should the firm produce to maximize profit?
b. Calculate marginal revenue and marginal cost for each quantity. Graph them. At what quantity do these curves cross? How does this relate to your answer to part (a)?
c. Can you tell whether this firm is in a competitive industry? If so, can you tell whether the industry is in a long-run equilibrium?
8. An industry currently has 100 Firms, all of which have fixed costs of $16 and average variable cost as follows:
|
Quantity
|
Average variable Cost
|
|
1
|
$1
|
|
2
|
2
|
|
3
|
3
|
|
4
|
4
|
|
5
|
5
|
|
6
|
6
|
a. Compute marginal cost and average total cost.
b. The price is currently $10. What is the total quantity supplied in the market?
c. As this market makes the transition to its long-run equilibrium, will the price rise or fall? Will the quantity demanded rise or fail? Will the quantity supplied by each firm rise or fall?
d. Graph the long-run supply curve for this market.
9. Draw the cost curves for a typical firm for a given price; show how the firm chooses the level of output to maximize its profit.
10. Under what conditions the firms shut down and exit the market?