Chapter 7

Chapter 7 Question two Fixed and variable inputs for a bakery Fixed inputs Variable inputs Rent Wages for hourly workers Loan interest Electricity Taxes on property Fuel Fire insurance Raw materials Question four The figure above perfectly depicts the statement, "Total output starts falling when diminishing returns occur." In the law of diminishing returns, the marginal product at some point falls with an increase in the variable factor's units to the fixed inputs. The figure depicts the increasing number of bushels daily, increasing the total output. A diminishing return occurs, thus decreasing the overall output because the satisfaction with the bushel of grapes is optimum.

Question six a) Cost schedule using data in exhibit 11. Total output Q Total fixed cost (TFC) $ Total variable cost (TVC) $ Total cost (TC) $ Marginal Cost (MC) $ Average Fixed Cost (AFC) $ Average Variable cost (AVC) $ Average Total cost (ATC) $ 0 50 0 50 - - - 20 1 50 20 70 50 20 70 15 2 50 35 85 25 17.5 42.5 10 3 50 45 95 16.6 15 31.6 5 4 50 50 100 12.5 12.5 25 10 5 50 60 110 10 12 22 20 6 50 80 130 8.3 13.3 21.6 35 7 50 115 165 7.1 16.4 23.5 50 8 50 165 215 6.2 20.6 26.8 60 9 50 225 275 5.5 25 30.5 b) Graph average variable cost, average total cost and marginal cost curve.

= average fixed cost + average variable cost =$5 + $15 =$20 Question 10 Since Computech deals with the manufacture of electronic components, a decline in the demand for its modules would reduce sales, reducing revenue in turn. Therefore, the cost curve would shift downwards because it combines the average fixed cost curve and the average variable cost curve. Chapter 8 Question two The Kansas wheat farmer works in a perfectly competitive market because they sell the same products, i.e. no product differentiation. There are also many buyers and sellers of wheat with different prices that the supplier doesn’t have control over the prices for the wheat. Question four 0 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30 35 40 45 Marginal and total revenue graphs TR MR quantity price The marginal revenue and the price are linked to the total revenue curve. The marginal revenue is positive and constant at $5 per bushel, while the total revenue curve is increasing at a constant rate such that its slope would equal the marginal revenue. Question six I disagree with the statement because profits are mainly estimated when the total revenue exceeds the total cost. Therefore, the revenue charged reflects the market value of the sales made and the quantity sold. Therefore, firms should focus more on increasing their revenue and reducing costs to make more profit. They should also understand that there is no profit at all

output levels because the total cost will exceed revenue with an increase in output, thus making a loss. Question eight a) At MR 3, the firm nets an economic profit because the demand curve is above the minimum average variable cost points. b) The demand curve of MR 2 indicates that the firm is making a loss because the demand curve is below the average total cost curve but above the average variable cost. c) The demand curve of MR 1 indicates that the firm will shut down because it’s below the average variable cost and average total cost curves. d) The firm’s short-run supply curve is the portion where the marginal cost curve lies above the average variable cost curve. Question ten If a firm’s demand curve is below the average total cost curve, then its earning economic profit; therefore, its average variable cost should not exceed the profit and also don’t exceed the average total cost curve. Alternatively, the firm should maintain its d9 emand curve above the average variable cost curve at the profit maximization output. Question Twelve If the firms earn a positive economic profit, then the price of the trucking services is likely to decrease until equilibrium. The industry quantity of output is likely to decrease because firms will earn zero economic profit in the long run. The profit of the trucking firms will be normal profits earned in the long run.