Krugman/Wells

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Krugman/Wells

Behind the Supply Curve:Inputs and Costs

12

CHECK YOUR UNDERSTANDING

Check Your Understanding 12-1 Question 1

Bernie’s ice-making company produces ice cubes using a 10-ton machine and electricity. The quantity of output, measured in terms of pounds of ice, is given in this table:

1ai) Bernie’s ice-making company produces ice cubes using a 10-ton machine and electricity. The 10-ton machine is a _____ input.

1. fixed

2. variable

1aii) Bernie’s ice-making company produces ice cubes using a 10-ton machine and electricity. The electricity is a _____ input.

1. fixed

2. variable

1bi) Calculate the marginal product of the third unit of the variable input.

1. 1000

2. 900

3. 800

4. 600

1bii) The calculation of all of the marginal products reveals that there are _______ returns to the input.

1. increasing

2. diminishing

1ci) Bernie’s ice-making company produces ice cubes using a 10-ton machine and electricity. 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?

1. the 10 ton machine



4. 6 kilowatts of electricity

1cii) Suppose a 50% increase in the size of the fixed input increases output by 100% for any given amount of the variable input. Given the original production function, the quantity of ice that can be produced using 2 units of the variable input is _____.

1. 900

2. 1800

3. 2700

4. 3600

NEW CHECK YOUR UNDERSTANDING

Check Your Understanding 12-2 Question 1*

Suppose that the fixed cost of making 10 game day t-shirts is $25, and the variable cost is $50.


1*) Suppose that the fixed cost of making 10 game day t-shirts is $25, and the variable cost is $50. Calculate average variable cost.

1. $75

2. $25

3. $7.50

4. $5.00


1*) Suppose that the fixed cost of making 10 game day t-shirts is $25, and the variable cost is $50. Calculate average total cost.

1. $75

2. $25

3. $7.50

4. $5.00


1*) Suppose that the fixed cost of making 10 game day t-shirts is $25, and the variable cost is $50. Calculate average fixed cost.

1. $25

2. $2.50

3. $7.50

4. $5.00


Alicia’s Apple Pies is a roadside business. Alicia must pay $9 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 × 1.5 = $1.50 to produce, and so on.

1ai) Alicia must pay $9 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 × 1.5 = $1.50 to produce, and so on.Calculate Alicia’s marginal cost of the 3rd pie.

1. $1.00

2. $1.25

3. $2.25

4. $3.00

1aii) Calculate Alicia’s variable cost of producing 3 pies (Hint: The variable cost of two pies is just the marginal cost of the first, plus the marginal cost of the second pie, and so on.)

1. $1.58

2. $3.25

3. $4.10

4. $4.75

1aiii) Alicia must pay $9 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. Calculate Alicia’s average fixed cost of producing 3 pies.

1. $1.00

2. $1.25

3. $2.25

4. $3.00

1aiv) Calculate Alicia’s average variable cost of producing 3 pies.

1. $1.58

2. $3.25

3. $4.10

4. $4.75

1av) Calculate Alicia’s average total cost of producing 3 pies.

1. $1.58

2. $3.25

3. $4.10

4. $4.58

1bi) The spreading effect dominates the range of output from _____ .

1. 0 to 3

2. 1 to 4

3. 2 to 5

4. 5 to 6

4 4.28

1bii) The diminishing returns effect dominates the range of output from _____ .

1. 0 to 3

2. 1 to 4

3. 2 to 5

4. 5 to 6

4.28

1ci) What is Alicia’s minimum cost output?

1. 1 pie

2. 2 pies

3. 4 pies

4. 5 pies

4.28

4

1cii) Making one more pie raises average total cost when output is greater than 4 pies because the marginal cost of the 5th pie is less than the average total cost of the first four pies.

1. True

2. False

4.28

4


The table below shows three combinations of fixed and average variables cost. Use it to answer the following questions.

1ai) For Choice 1 what is the average total cost of producing 12,000 units?

1. $1.80

2. $1.67

3. $1.00

1aii) Which choice leads to the lowest average total cost of producing 12,000 units?

1. Choice 1

2. Choice 2

3. Choice 3

1aiii) Which choice leads to the lowest average total cost of producing 22,000 units?

1. Choice 1

2. Choice 2

3. Choice 3

1aiv) Which choice leads to the lowest average total cost of producing 30,000 units?

1. Choice 1

2. Choice 2

3. Choice 3

1bi) Suppose that a firm has the choices 1, 2, and 3. Historically they have produced 12,000 units. Suddenly, demand increases sharply leading to a permanent change in production for the firm from 12,000 units to 22,000 units. In the short run we expect that the firm will produce using ______.

1. Choice 1

2. Choice 2

3. Choice 3

1bii) Suppose that a firm has the choices 1, 2, and 3. Historically they have produced 12,000 units. Suddenly, demand increases sharply leading to a permanent change in production for the firm from 12,000 units to 22,000 units. The average cost of production in the short run is _______.

1. $1.67

2. $1.75

3. $1.36

4. $1.30

1biii) Suppose that a firm has the choices 1, 2, and 3. Historically they have produced 12,000 units. Suddenly, demand increases sharply leading to a permanent change in production for the firm from 12,000 units to 22,000 units. In the long run we expect that the firm will produce using ______.

1. Choice 1

2. Choice 2

3. Choice 3

1biv) Suppose that a firm has the choices 1, 2, and 3. Historically they have produced 12,000 units. Suddenly, demand increases sharply leading to a permanent change in production for the firm from 12,000 units to 22,000 units. The average cost of production in the long run is _______.

1. $1.67

2. $1.75

3. $1.36

4. $1.30


For the following cases, choose the kind of scale effects you would expect.

2a) A telemarketing firm in which employees make sales calls using computers and telephones.

1. diseconomies of scale

2. economies of scale

3. constant returns to scale

2b) An interior design firm in which design projects are based on the expertise of the firm’s owner.




2c) A diamond-mining company




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