Problem Set #3

1. Problem Set #3

2. Instructions • Put away you pen and pencils • Put your name where it says “Graded by:” • We will grade questions 1 and 4 • After grading each question, write in their score in the blank. ex: ( ____/5) • Follow the directions explicitly!

3. Questions #1: Real World Examples 20 Points Total

4. A. Explicit and Implicit Costs • 5 Point Total • 1 Point- definition of explicit costs (traditional out of pocket costs) • 1 Point- Example showing explicit costs (costs to a firm or a consumer) • 1 Point- definition of implicit costs (opportunity costs that a firm or person must “pay” to themselves) • 1 Point- Example showing implicit costs (forgone wage, forgone time and effort) • 1 Point- Clarity of examples (numeric examples preferred)

5. B. Law of Diminishing Marginal Returns • 5 Point Total • 2 Points- Definition (As additional inputs (workers) are added to fixed resources, the additional output generated by each new input will eventually fall. • 2 Points- Example showing that MARGINAL PRODUCT (additional output from each new worker) will eventually fall • 1 Point (Clarity)- Numbers in example (numbers show how marginal product eventually falls)

6. C. Fixed, Variable, and Total Costs • 5 Point Total • 1 Point- definition of fixed costs (costs that DO NOT change with the amount produced) • 1 Point- Example of a fixed costs/resource • 1 Point- definition of variable costs (costs that change with the amount produced) • 1 Point- Example of a variable cost/resource • 1 Point- Example showing that Total cost equals fixed plus variable. (Numeric example)

7. D. Economies of Scale and Diseconomies of Scale 5 Point Total • 1 Point- definition of Economies of Scale (area of LRATC where ATC is decreasing) • 1 Point- Example of Economies of Scale • 1 Point- definition of Diseconomies of Scale (area of LRATC where ATC is increasing) • 1 Point- Example of Diseconomies of Scale • 1 Point- Clarity of examples

8. 2.a. Tony’s Hat Store • 2 point for completing the chart • 2 point for completing the graph • 2 point for completing all definitions • 4points for answering all questions • Each point(s) are ALL or NOTHING

9. 2.b. “Cost and Competitive Market Supply”

10. 2.b. Cost and Competitive Market Supply Part A: ½ point each 1. -correctly completing the chart -correctly completing the graph -answer all questions • B. 7, $11, $7, $11, $4, $28 C. 4.5, $11, $6/5.50, $11, $5/5.50, $22.50/24.75 D. 4, $6, loss, $1, loss, $4

11. Part B: ½ point each • Correctly complete the chart • Between 3 and 4, $6 • Correctly complete the chart • MC, MC, AVC 4A. Correctly complete the chart B. Answer the question C. $8, 6,000 units, positive economic profit D. increase, decrease, increase, decrease E. $6, 4, 2,000 firms, 0, 8,000 units, minimum F & G- Answer the questions

12. 2.c. MP and MC • 2 points for Explaining that the Marginal Product curve is a mirrored image of the Marginal Cost Curve. As MP increases MC Decreases and as MP decreases, MC increases. • 1 point for stating that the shape of the curves are because of the Law of Diminishing Marginal Returns. • 2 points for showing the MC curve using numerical examples

13. Why is the MC curve U-shaped? • The additional cost of the first 13 units produced falls because workers have increasing marginal returns. • As production continues, each worker adds less and less to production so the marginal cost for each unit increases.

14. 3. Cory’s Surfboard Inc. 20 Points Total

15. 3.The Chart 5 Point Total 1 Point 1 Point 1 Point 1 Point 1 Point

16. 3. A: Plotted Graph 5 Point Total 1 point- Correctly labeled axis with numbers 1 point- Correctly plotted MC 1 point- Correctly plotted ATC 1 point- Correctly plotted AVC 1 point- Correctly plotted AFV MC ATC AVC Cost/Price AFC Quantity

17. Question #3B5 point total • 1 point for stating an increase in the price of an input (styrofoam) will increase resource costs (MC increases or supply decreases) • 2 points for stating that an increase in variable costs will increase the MC, ATC and AVC curves. • 1 point for stating that an increase in a fixed input (rent) will NOT change the MC curve • 1 point for stating that an increase in fixed costs will increase the ATC and AFC only.

18. Question 3.C. • 5 Point Total • 1 point- Output = 7 surfboards • 1 point-Correctly placing the MR curve at $150 • 2 point- $65.71 Profit per Unit • 1 point- Explanation- Cory is selling each unit for $150 and his cost for each surfboard is $84.29. • OR • Total Profit equals TR ($1050)- TC ($590)= $460 • $460 divided by 7 equals $65.71

19. 4a. In-Class FRQ 12 Points Total

20. 4a. 2005 FRQ P P Q q Firm MC ATC D=MR

21. 4a. 2005 FRQ P P P Q q Firm MC ATC D=MR

22. 4a. 2005 FRQ

23. 4a. 2005 FRQ

24. 4a. 2005 FRQ Check that it is UP to ATC

25. 4a. 2005 FRQ Check that it is UP to ATC

26. 4a. 2005 FRQ Check that it is UP to ATC

27. 4a. 2005 FRQ Check that it is UP to ATC

28. 4a. 2005 FRQ

29. 4a. 2005 FRQ

30. 4a. 2005 FRQ

31. 4a. 2005 FRQ