al’s sub shop al and dale’s sub station subway proprietorship partnership corporation ______...
TRANSCRIPT
proprietorship
partnership
corporation
______
______
______
Liability
Unlimited?
Limited?
______
______
______
Sharing
Financing?
Knowledge?
Profits?___
___
___
Number of Owners
Total Fixed Costs
Do change with output
Do not change with output
Total Variable CostsTotal Costs = TFC + TVC
The factory size can change
Long Run
Factors like labor and raw materials can be changed
Short Run:
laborraw materials
rent
bourbon scotch beer
Average Fixed Costs
Do change with outputDo not change with output
Average Variable CostsAverage Total Costs = ?+?Marginal CostChange in cost with 1 more
output
She produces these in her own home without any help, unless she has a large number of orders on a
particular day.
Marcia Deal bakes and decorates large, elaborate,
multi-layered, special occasion cakes.
With the following information, complete the table
The total cost of producing 5 cakes is $135Marcia’s total fixed cost for 1 cake is $25
The total cost of 2 cakes is $60The total variable cost for 1 cake is $25
The total variable cost of producing 7 cakes is $220The marginal cost of the 6th cake is $45
The marginal cost for the 8th cake is $91The ATC per cake when 3 cakes or
when 4 cakes are made is $25
Why is the Marginal Cost of the 7th and 8th cakes fairly
high?
Number of Cakes
Total Cost
Total Fixed Cost
Total Variable Cost
Average Total Cost
Marginal Cost
0
1
2
3
4
5
6
7
8
$120
110
100
90
80
70
60
50
40
30
20
10
0 1 2 3 4 5 6 7 8 Number of
Cakes
Avera
ge T
ota
l C
ost
and M
arg
inal C
ost
If Marcia can sell from 0 - 8 cakes at $40 each, how many will she choose to produce and sell per day if she is
trying to maximize her profits??
Complete the table to check
Do the numbers in the Total Profit column and in the Marginal
Revenue and Marginal Cost columns support that?
Number of Cakes
Total Revenue
Total CostTotal Profit
Marginal Revenue
Marginal Cost
0
1
2
3
4
5
6
7
8
On the second graph, plot the average total cost and marginal
cost of producing from 0 – 8 cakes.
Use the data from the table
Plot the marginal cost at the midpoints
Why does total cost exhibit this pattern in this exercise?
On the graph, plot the total cost of producing from 0 – 8 cakes.
Output TFC TVC TC0 100 0 1 50
2 90
3 120
4 160
5 220
6 300
7 400
8 5209 670
10 900
______
___
___
___
___
____________
100
100
100
100
100
100
100
100
100
100
100
150
190
220
260
320
400
500
620
770
1000
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___
___
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____________
Output AFC AVC ATCMC0 (TFC/output) (TVC/output) (TC/output) (TC1-TC0)
1 ________ ________ ________ _____
2 ____________ ____________ ____________ _______
3 ____________ ____________ ____________ _______
4 ____________ ____________ ____________ _______
5 ____________ ____________ ____________ _______
6 ____________ ____________ ____________ _______
7 ____________ ____________ ____________ _______
8 ____________ ____________ ____________ _______
9 ____________ ____________ ____________ _______
10 ____________ ____________ ____________ _______
1
2
3
4
5
6
7
8
9
10
100
50
33
25
20
17
14
12
11
10
50
45
40
40
44
50
59
65
74
90
150
95
73
65
64
67
73
78
85
100
50
40
30
40
60
80
100
120
150
230
Cost
Output
600
500
400
300
200
100
1 2 3 4 5 60 7 8 9 10
Total Variable Cost
Total Fixed Cost
Total Cost
700
800
900
LRAC
Houses Built
600,000
500,000400,000
300,000
200,000
100,000
1 2 3 4 5 60 7 8 9 10
Constant Returns to
Scale
Diseconomies of Scale
Economies of Scale
Gets less efficient as size
increases
Gets more efficient as size increases
Efficient Range of Production
Economies of Scale
Less efficient as size increases
More efficient as size increasesDiseconomies of Scale
Constant Returns to ScaleEfficient Range of Production
The least cost combination of inputs.
Efficient Production
The recipe: going from inputs to outputs
It varies by firm
Like Labor
In the beginning, output increases with each unit added, but at some point output will begin to decrease
with each additional unit of a resource.
ATC curve goes down as efficiency increases
Then begins to go up
The Law of Diminishing Returns
Labor Total Marginal AverageData: Output
0 01 32 83 124 155 176 18
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35432
1
______
___
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3443.75
3.4___3
1. Which of the following is most likely to be an implicit cost of production?
a. property taxes on a building owned by the firmb. transportation costs paid to a trucking supplierc. rental payments for a building utilized by the company and rented
from another partyd. interest income foregone on funds invested in the firm by the
owners
2. The law of diminishing returnsa. explains why marginal cost eventually increases as output expands.b. implies that average fixed cost will remain unchanged as output expands.c. is true for physical production activities but not for activities such as studying.d. applies to a capitalist economy but would be irrelevant if the means of production were owned by the state.
3. Which of the following represents a long-run adjustment?a. the hiring of four additional cashiers by a supermarketb. a cutback on purchases of coke and iron ore by a steel manufacturerc. construction of a new assembly-line plant by a car manufacturerd. the extra dose of fertilizer used by a farmer on his wheat crop
4. The short-run average total cost (ATC) curve of a firm is U-shaped becausea. larger firms always have lower per-unit costs than smaller firms.b. at low levels of output, AFC will be high, while at high levels of output, MC will be high as the result of diminishing returns.c. diminishing returns will be present when output is small, and high AFC will push per-unit cost to high levels when output is large.d. diseconomies of scale will be present at both small and large output rates.
5. When costs that vary with the level of output are divided by the output, you have calculated
a. total changing cost. b. total fixed cost.c. average fixed cost. d. average variable cost.6. A downward-sloping portion of a LR average total cost curve is the result of
a. economies of scale. b. diseconomies of scale.c. diminishing returns. d. the existence of fixed resources.
7. In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be a. $25. b. $2,500. c. $5,000. d.$7,500.
At what output in the graph would the firm’s per-unit cost of production be minimized?a.3 b. 4 c. 5 d. 6What is the firm’s approximate total cost when it produces three units?a.10 b. 16 c. 48 d. 60
What is the firm’s total cost when it produces four units?a.11 b. 15 c. 60 d. 75 The average variable cost and average
total cost for a firm are indicated in the graph. If the marginal cost curve were constructed, at what output would it cross the AVC curve?a. 10 b. 15 c. 20 d.
25At what output should a the marginal cost curve cross the ATC curve?a. 15 b. 20 c. 25 d.
30
b. 4
c. 48
c. 60
b. 15
b. 20