REVIEW QUESTIONS
- The WipeOut Surf Company manufactures surfboards for beginners. Fixed costs are $30. Fill in Table 6.16 for total cost, average variable cost, average total cost, and marginal cost.
|
Quantity |
Variable Cost |
Fixed Cost |
Total Cost |
Average Variable Cost |
Average Total Cost |
Marginal Cost |
|
0 |
0 |
$30 |
|
|
|
|
|
1 |
$10 |
$30 |
|
|
|
|
|
2 |
$25 |
$30 |
|
|
|
|
|
3 |
$45 |
$30 |
|
|
|
|
|
4 |
$70 |
$30 |
|
|
|
|
|
5 |
$100 |
$30 |
|
|
|
|
|
6 |
$135 |
$30 |
|
|
|
|
- Based on your answers to the WipeOut Surf Company in Review Question 6.1, now imagine a situation where the firm produces a quantity of 5 units that it sells for a price of $25 each.
- What will be the company’s profits or losses?
- How can you tell at a glance whether the company is making or losing money at this price by looking at average cost?
- At the given quantity and price, is the marginal unit produced adding to profits?
- Suppose the cost of machines increases to $55, while the cost of labor stays at $40. How would that affect the total cost of the three methods? Which method should the firm choose now?
- What are explicit and implicit costs?
- Would you consider an interest payment on a loan to a firm an explicit or implicit cost?
- What is the difference between accounting and economic profit?
- What shapes would you generally expect a total product curve and a marginal product curve to have?
- What are the factor payments for land, labor, and capital?
- Are there fixed costs in the long-run? Explain briefly.
- Are fixed costs also sunk costs? Explain.
- What are diminishing marginal returns as they relate to costs?
- Which costs are measured on per-unit basis: fixed costs, average cost, average variable cost, variable costs, and marginal cost?
- What is a production technology?
- In choosing a production technology, how will firms react if one input becomes relatively more expensive?
- What is a long-run average cost curve?
- Why will firms in most markets be located at or close to the bottom of the long-run average cost curve?
