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B. C. B-. B+. A. D. A+. C-. C+. A-. D+. 100. 90. 70. 50. 80. 60. D+. The Cost Curves of Parson’s Mill. Timothy Lewontin, Parsons’ Mill. Fundamental Assumption: Parsons’ goal is to maximize profits. Economic research on non-profit institutions changes the assumption, e.g.,.

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  1. B C B- B+ A D A+ C- C+ A- D+ 100 90 70 50 80 60

  2. D+

  3. The Cost Curves of Parson’s Mill

  4. Timothy Lewontin, Parsons’ Mill Fundamental Assumption: Parsons’ goal is to maximize profits. Economic research on non-profit institutions changes the assumption, e.g., claims that its only goal is “getting getting mines out of the ground, now.” Timothy had no contract and Parsons had no obligation to him beyond day to day—he was hired “at will,” allowing Parsons to fire him at anytime, without need for explanation. And, he did, six months after Timothy started working there. A year later, Parsons’ closed the mill, auctioned off the equipment, and dismantled the mill. Short-run: the time period over which some inputs are fixed. Fixed Inputs: mill and equipment (i.e., K) Variable Inputs: Labor (Timothy), fuel and wood

  5. Parson’s Mill Single Production Line Substantial Looking Machine Trim Saw       short dowels boards ripsaw blanks long dowels Inspected & bundled into packets of 50 dowels To my horror and amazement, the [substantial looking machine] started to deposit [dowels] on my supply cart… I struggled valiantly to keep up. But no matter how fast I worked, Craig could feed them through faster. When he'd gained a sufficient lead on my supply cart, he shut the machine down…

  6. Parsons Mill’s Production Function 0 1 2 3 4 5 6 7 8 9 0 10 30 60 100130150 160165 165

  7. The Law of Diminishing Marginal Returns Marginal product: the additional output from one more unit of the variable input , e.g., the additional dowels from one more laborer. 0 1 2 3 4 5 6 7 8 9 0 10 30 60 10 The Law of Diminishing Marginal Returns: as you add more and more labor (variable input) to the mill and machinery (fixed inputs), the marginal product of labor (variable input) must eventually decrease. 20 30 40 100130150 160165 165 30 20 10 5 0

  8. (MPL=9)=0, i.e., nothing left to do Parsons Mill’s Production Function Output is increasing at an decreasing rate because of the limited number of machines (MPL) Output is increasing at an increasing rate due to specialization of labor (MPL)

  9. Great Plains of the 1870s—(1) conflict between farmers & cattle ranchers over stray cattle, (2) wood was scarce. De Kalb County Fair of 1873 smooth wire wooden rail with spikes had a better idea Joseph Glidden Patent Drawing

  10. Glidden initially made his barbed wire using a coffee bean grinder in his house out-of-pocket expenses Barb Fence Company, 1874 accounting π = (total revenue − explicit cost) $1000 Total Revenue $500 Raw Materials (wire) = $1000 − $500 $100 = $500 Forgone Salary $24 Forgone Rent costs that do not require an outlay of $ $1 Rental Value of Grinder economic π = total revenue − explicit cost − implicit cost economic π = $1000 − ($500) − ($100 + $24 + $1) = $375 encouraged entry of competitors

  11. The Cost Curves of Parsons’ Mill Total Fixed Costs (TFC) do not vary with the level of output Assumptions fixed inputs Rental Value of Mill and Equipment = $125 per day Wages of Labor = $50 per workday Total Variable Costs (TVC) depend on the level of output variable input

  12. 0 1 2 3 4 5 6 7 8 9 0 10 30 60 125125125125125125125125125125 0 125175225275325375425475525575 17.5 50 100150200250300350400450 7.50 4.58 100130150 160165 165 3.25 2.88 2.83 2.97 3.183.48

  13. 7.5 ATC 30

  14. 7.5 ATC 30

  15. Marginal cost is the cost of producing an additional unit of output (bundles of per day) 0 0 125 5 5 1 10 175 2.5 20 2 30 225 1.67 45 3 60 275 1.25 80 4 100 325 1.67 115 5 130 375 6 150 425 2.5 140 5 155 7 160 475 10 162.5 8 165 525

  16. MC 5 ATC 5

  17. MC 5 ATC 5

  18. ATC is high because fixed costs are spread over a small number of dowels MC is high because MPLabor is low MC ATC= min where MC=ATC ATC>MC, ATC must  ATC<MC, ATC must  MC ATC ATC AVC ATC MC

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