Thursday, 11/01/01
Problem 4 - Each month, the owner of a store must pay $550 for labor, $600 for merchandise, $50 for insurance, and $100 for advertising. The owner could work for someone else for $2,000 per month, and could rent the store to someone else for $2,000 per month. The store's revenue is $4,250 per month. Do you think an accountant would tell the store owner that she is earning a profit? Do you think an economist would tell the store owner that she is earning a profit?
The thing you need to remember here is the distinction between accounting and economic profit. This problem is very straightforward and yes, it is as easy as it looks.
Problem 5 - Do problem 11 on page 289. Consider the following table of long-run total cost for three different firms:
| Firm | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
|---|---|---|---|---|---|---|---|
| Firm A | $60 | $70 | $80 | $90 | $100 | $110 | $120 |
| Firm B | $11 | $24 | $39 | $56 | $75 | $96 | $119 |
| Firm C | $21 | $34 | $49 | $66 | $85 | $106 | $129 |
Does each of these firms experience economies of scale or diseconomies of scale?
For this problem, all you need to look at is the average total cost at each quantity for each firm. Also, remember that there is a third possibility: constant returns to scale.
Problem 6 - You always take the same number of credit hours each year. Your GPA in your first year classes was 2.6, your GPA in your second year classes was 3.4, your GPA in your third year classes was 3.0, and your GPA in your fourth year classes was 2.8. Was your overall GPA at the end of your second year higher, lower, or the same as your overall GPA at the end of your first year? Was your overall GPA at the end of your third year higher, lower, or the same as your overall GPA at the end of your second year? Was your overall GPA at the end of your fourth year higher, lower, or the same as your overall GPA at the end of your third year?
The point of this problem is to draw the parallel to what happens when you make one more unit of output. Every time you make another unit, the cost of producing that unit gets added to your total cost and can either pull down or pull up the average when you recalculate.
Problem 7 - In the following table, you will find a firm's short run total costs for several different levels of output:
| Output | Total Cost |
|---|---|
| 0 | $15 |
| 1 | $20 |
| 2 | $23 |
| 3 | $25 |
| 4 | $30 |
| 5 | $40 |
| 6 | $54 |
For each level of output, calculate total fixed cost, total variable cost, and marginal cost.
This is very straightforward plus, minus, and divide.
Discussion will be very fast this week...