Unit 3 Costs of Production & Perfect Competition Problem Set #3 PDF

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Costs of Production & Perfect Competition Problem Set...

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Unit 3 Problem Set #3 1. a. Accounting Profit is the total revenue minus the explicit costs, which are the traditional out-of-pocket costs. Economic Profit is the total revenue minus the explicit and implicit costs, such as time and money. b. The Law of Diminishing Marginal Returns states that by increasing the input of a production at some point the total product, marginal product, and average product will start rising at slower rates and eventually start to decrease. c. Fixed Costs are costs for fixed resources that don’t change with the amount produced, such as rent, machinery, and manger’s salary. Variable Costs are costs for variable resources that change as more of less is produced, such as raw materials, labor, and electricity. Total Cost is the fixed costs plus the variable costs. d. Economies of Scale are when firms produce more and are able to better use Mass Production Techniques and Specialization. More output spreads the fixed cost over more and more product, resulting in a lower AFC and ATC to a point. A company that makes only 50 units of a good will sell those goods for a much higher price than a company that makes 500 units of that same good. Diseconomies of Scale are when companies become too large to manage, causing the ATC to rise. 2. a. b. c. When the marginal product curve increases the marginal cost curve falls, and when the marginal product curve falls, the marginal cost curve increases. The marginal product curve and the marginal cost curve are mirror images of each other. The marginal cost curve is the supply curve in disguise, therefore it is “U” shaped. 3. a. b. c. If the cost of Styrofoam increases, the variable cost, total cost, average variable cost, average total cost, and marginal cost would also increase. If Cory’s rent increases, the fixed cost, total cost, average fixed cost, and average total cost would increase. The results are different because Cory’s rent is a fixed cost and therefore a constant that wouldn’t affect the average variable cost or the marginal cost, but the price of Styrofoam is a variable cost, so while it doesn’t affect the average fixed cost, it is a scalar and affects the marginal cost. d. Cory should make 7 surfboards, and he would make a profit of $65.7 for each surfboard. Since the market price is $150 and his total profit is $84.3, his profit is 150 - 84.3 = 65.7. 4.

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b. If income increases by 15% the demand for apples will fall in the short run causing the price and quantity to decrease. The firm will also experience a loss, and firms will start to exit the industry.

c. After experiencing a loss and having firms exit the industry, the market returns to the long-run equilibrium when those firm breaks even, making a normal profit....