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Ch. 13 Cost of Production: Problems and Applications: 1-5

Ch. 13 Cost of Production: Problems and Applications: 1-5 . 1. a – Opportunity cost B – ATC C- Fixed Costs D- Variable costs E- Total Costs F- Marginal Costs. 2. Cost $500,000 / year rent and stock Quit $50,000 accounting job A – Define O.C. –

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Ch. 13 Cost of Production: Problems and Applications: 1-5

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  1. Ch. 13 Cost of Production: Problems and Applications: 1-5 • 1. a – • Opportunity cost • B – • ATC • C- • Fixed Costs • D- • Variable costs • E- • Total Costs • F- • Marginal Costs

  2. 2. • Cost $500,000 / year rent and stock • Quit $50,000 accounting job • A – Define O.C. – • Whatever must be given up to obtain some item • B- O.C. of running hardware store for year • $550,000 ($500,000 for rent + $50,000 salary given up)

  3. Thought she could sell $510,000 in merchandise in year, should she open store? • She should NOT open the store because • she would earn an economic profit of $ - 40,000 (or loss of $40,000) TR $510,000 – TC $550,000 = Profit of – $40,000 • Bonus – accounting profit? • TR $510,000 - TC $500,000 = $10,000 Profit

  4. 3. College charges separately for tuition, and room/board • A. what is a cost of college that is not OC? • Room and Board are NOT opportunity costs of going to college because you would have to pay to live and eat somewhere anyways (even if at your parents house) • B Explicit O.C.? • Tuition • C. Implicit O.C.? • giving up a job (salary) now in order to get education

  5. MP 10 8 6 4 2 • 4. Hours Q Fish (lbs.) 0 0 1 10 2 18 3 24 4 28 5 30 • MP of each hour spent

  6. 4b Graph the production function • Explain its shape • As input increases (hours), the output (fish) increases but at a slower rate = DMP

  7. 4c Fixed cost ($10 pole) and OC of time is $5/hour – graph total cost curve Explain its shape As the slope gets steeper – it illustrates that each additional hour adds to the total cost at a constant rate of +5, but the output is increasing at a diminishing rate = DMP

  8. 5. a Fill in MP, what pattern do you see? Explain it MP starts off rising and then with the 4th worker, MP begins to fall = DMP

  9. B. worker costs $100/day, and FC $200. Fill in TC • C. fill in ATC, what pattern do you see? ATC starts falling and then with the 6th unit begins to rise again

  10. D. fill in MC. What pattern do you see? = MC is falling and then with the 4th worker , MC begins rising again ……due to increasing MP and then Decreasing MP

  11. E. compare MP and MC – Explain relationship • As MP rises, MC falls • As MP falls, MC rises

  12. F. compare MC and ATC- Explain relationship • As MC < ATC, ATC is falling • As MC > ATC, ATC is rising • MC crosses ATC at min (= efficient scale)

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