question # 14 KEY TERMSaverage fixed cost (AFC), 493average total cost (ATC), 489average variable cost (AVC), 493constant returns to scale, 496diseconomies of scale, 494economies of scale, 4940102030EXERCISES1. Use the following information to determine the total fixedcosts, total variable costs, average fixed costs, average vari-able costs, average total costs, and marginal costs.TotalOutput Costs TFC405060012500345. Constant returns to scale occur when increases in out-put lead to no changes in unit costs and the quantitiesof all resources are variable. $22-3a• Specialization can lead to economies of scale-largersize enables people to specialize in the jobs where theyuse their comparative advantage. $22-3bChapter 22 Supply: The Costs of Doing Business$100$150$225$230$300$4002. Use the following table to answer the questions thatfollow.TotalOutput Cost TFC TVC AFC AVC ATC MC$ 20$ 40$ 60$ 90$120$180$280law of diminishing marginalreturns, 488long-run average-total-cost curve(LRATC), 495marginal cost (MC), 490minimum efficient scale (MES), 498TVC AFC AVC ATC MCThe minimum efficient scale (MES) occurs at the min-imum point of the long-run average-total-cost curve,$22-3ca. Calculate the total fixed costs, total variable costs, av-erage fixed costs, average variable costs, average totalcosts, and marginal costs.The long run is the planning horizon, where all resour-ces are variable. Once a size or scale is selected, thefirm is operating in the short run. $22-3dscale, 494short-run average total cost(SRATC), 493total costs (TC), 492total fixed costs (TFC), 492total variable costs (TVC), 492b. Plot each of the cost curves.c. At what quantity of output does marginal cost equalaverage total cost and average variable cost?3. Using the table in exercise 1, explain what happens toATC when MC> ATC, MC< ATC, and MC = ATC.4. Using the table in exercise 2, find the quantity whereMC ATC. Find the quantity where ATC is at itsminimum. Find the quantity that is the most efficientoperating point for the firm.5. Describe some conditions that might cause large firmsto experience inefficiencies that small firms would notexperience.6. What is the minimum efficient scale? Why woulddifferent industries have different minimum efficientscales?7. Describe the relation between marginal and averagecosts. Describe the relation between marginal andaverage fixed costs and between marginal and averagevariable costs.8. Explain why the ATC and MC curves are U-shaped.9. Explain why the short-run marginal-cost curve mustintersect the short-run average-total-cost curve at theminimum point of the ATC. Does the marginal-costcurve intersect the average-variable-cost curve at itsminimum point? What about the average-fixed-costcurve? Explain why the marginal-cost curve does notalso intersect the average-fixed-cost curve at its mini-mum point.Chapter 22 Supply: The Costs of Doing Business10. Why does the minimum point of the average-total-costcurve show the quantity at which the firm is most effi-ciently supplying output in the short run?11. Consider a firm with a fixed-size production facility asdescribed by its existing cost curves.a. Explain what would happen to those cost curves if amandatory health insurance program were imposedon all firms.b. What would happen to the cost curves if the planrequired the firm to provide a health insurance pro-gram for each employee worth 10 percent of theemployee's salary?c. How would that plan compare to one that requireseach firm to provide a $100,000 group program thatwould cover all employees in the firm, no matterwhat the number of employees was?12. Does the following statement make sense: "You made areal blunder. The $600 you paid for repairs is worthmore than the car."13. Explain the statement, "We had to increase our volumeto spread the overhead."14. Three college students are considering operating atutoring business in economics. This business wouldrequire that they give up their current jobs at the stu-dent recreation center, which pay $6,000 per year.A fully equipped facility can be leased at a cost of$8,000 per year. Additional costs are $1,000 a year501for insurance and $.50 per person per hour for materi-als and supplies. Their services would be priced at $10per hour per person.a. What are fixed costs?b. What are variable costs?c. What is the marginal cost?d. How many student-hours would it take to breakeven?15. Express Mail offers overnight delivery to customers. Itis attempting to come to some conclusion on whetherto expand its facilities. Currently its fixed costs are $2million per month, and its variable costs are $2 perpackage. It charges $12 per package and has a monthlyvolume of 2 million packages. If it expands, its fixedcosts will rise by $1 million and its variable costs willfall to $1.50 per package. Should it expand?16. Suppose the cost of starting Business A is very, veryhigh. But once begun, the marginal cost of additionaloutput is near zero. Draw this situation using themarginal-cost curve.17. It requires a large sum of money to produce a musicalCD. The band has to be formed, practiced, and soforth. The recording studio has to be rented and themusic performed and taped. Once one CD has beencreated, it costs virtually nothing to produce additionaCDs. Draw the average and marginal costs for thisbusiness.

Fixed costs are the costs that do not change with the number of units produced. These costs are…

Chapter 22 Supply: The Costs of Doing Business Why does the minimum point of the average-total-cont curve show the quantity at which the firm in most eff ciently supplying output in the short run! II. Consider a firm with a fixed-size production facility as described by its existing cost curves. Explain what would happen to those cost curves mandatory health insurance program were imposed & What are variable costs What is the marginal cont on all firms. d. How many student hours would it take to break event What 15. Express Mall offers overnight delivery to whether required the firm to provide a health insurance pro gram for each employee worth 10 percent of the employee's salary! How would that plan compare to one that requires each firm to provide a $100.000 group program that would cover all employees in the firm, no matter what the number of employees was? is attempting to come to some conclusion on to expand its facilities. Currently its fixed costs are $2 million per month, and its variable costs are $2 per package. It charges $12 per package and has a monthly volume of 2 million packages. If it expands its fixed costs will rise by $1 million and its variable costs will fall to $1.50 per package. Should it expand? 16. Suppose the cost of starting Business A is very, very high. But once begun, the marginal cost of additional output is near zero. Draw this situation using the marginal-cost curve 17. It requires a large sum of money to produce a musical CD. The band has to be formed, practiced, and so forth. The recording studio has to be rented and the music performed and taped. Once one CD has been created, it costs virtually nothing to produce additions CDs. Draw the average and marginal costs for this business. 12. Does the following statement make sense: "You made a real blunder. The $600 you pa for repairs is worth more than the car." 13. Explain the statement, "We had to increase our volume to spread the overhead." 14. Three college students are considering operating a tutoring business in economics. This business would require that they give up their current jobs at the stu dent recreation center, which pay $6,000 per year. A fully equipped facility can be leased at a cost of $8,000 per year. Additional costs are $1,000 a year 501 for insurance and 1.50 per person per hour for materi als and supplies. Their services would be priced at $10 per hour per person