Economics 172

Homework  8   Chapter 8  Due Friday April 8

 

Review Questions

1, 5, 11, 14, 19, 21

 

8.1. 

Q

TFC

TVC

TC

MC

AFC

AVC

ATC

 

 

 

=(TFC+TVC)

 

=FC/Q

=TVC/Q

=TC/Q or (AFC+AVC)

1

$100.00

$50.00

$150.00

$50.00

$100.00

$50.00

$150.00

2

$100.00

$80.00

$180.00

$30.00

$50.00

$40.00

$90.00

3

$100.00

$120.00

$220.00

$40.00

$33.33

$40.00

$73.33

4

$100.00

$170.00

$270.00

$50.00

$25.00

$42.50

$67.50

5

$100.00

$250.00

$350.00

$80.00

$20.00

$50.00

$70.00

 

8.5.  Yes, if the LR marginal cost curve is U shaped, then it must follow that if MC is below LAC, the LAC is falling.  If MC is above LAC, then LAC is rising.  Therefore, LAC must be U shaped.

 

8.11.

The key point here is that when the LAC reaches its minimum, LAC = LMC and then LMC and LAC are the same line.

 

8.14.  An alternative explanation is that decreasing returns to scale set in at a much lower share of the market in textiles than in automobile manufacturing.    That is, a big car manufacturing company can produce at lower per unit costs than a smaller company, so car companies need to be large to be efficient.  In textiles, that is not true.  So the minimum efficient scale in textiles is smaller (as a percent of the total market size) than in autos.

 

8.19.  TC = a + bq + cq2

 

          TFC = a

          TVC = bq + cq2      

MC = dC/dQ = b + 2cq

          AFC = FC/q = a/q

          AVC =  TVC/q = b + cq

          ATC = TC/q = a/q + b + 2cq

 

8.21.  Jefferson was saying that to minimize costs, you use input combinations based on the cost of those inputs.  In Europe, labor is abundant (and therefore cheaper) and land is expensive, so farmers used a lot of labor relative to land.  In Virginia, land was abundant and hence cheaper, and labor was expensive so to produce the same amount of agricultural output in Virginia, a farmer would use more land and less labor. 

 

 

 

I.a  Under a new government law, each television produced must now contain a V-chip that permits parents to block reception of certain programs.  The V-chip raises firms’ production costs by $50 per television set.  Will the new law affect a television manufacturer’s short run average cost curve?  Will it affect the short run marginal cost curve?  Explain.

 

The V-chip adds to the cost of production, so it definitely increases the marginal cost of producing one more television.  It will also increase the average cost of producing each TV by $50. 

 

 

b.  Under a new government law, each television manufacturer must contribute $10,000 per year to help fund a commission that established technological ofrmats and standards for the television industry.  Will the new law affect a television manufacturer’s short run average cost curve?  Will it affect the short run marginal cost curve?  Explain.

 

This new law increases the fixed costs of producing TVs.  It has no impact on the cost of producing one more TV, so there is no change in the short run marginal cost curve or the average variable cost of producing TV’s in the short run.  It does increase the average total cost of producing TVs.