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Name: _____________________________ Practice: Costs of Production Production and the Law of Diminishing Marginal Returns* Calculate MP. Plot TP and MP on Graph Output Number of Total Marginal 20 Workers Product Product 0 1 2 3 4 5 6 0 5 15 19 20 20 18 15 10 Define the Law of Diminishing Marginal Returns 5 0 1 2 3 4 5 6 Workers Identify the three stages of returns: increasing, decreasing, After which worker does diminishing marginal and negative marginal returns returns set in? Revenue and Costs* (Define the following) Total RevenueFixed Cost (FC)Accounting Profit- Variable Cost (VC)- Economic Profit- Total Cost (TC)- Normal Profit- Marginal Cost (MC)- Short Run Cost Curves* (at least one fixed resource) Draw and Label ATC, AVC, and MC Costs Long-Run Cost Curves (all resources are variable) Costs Output Economies of Scale- Diseconomies of ScaleOutput Name: _____________________________ Calculating ATC, AVC, AFC, and MC Fill in the blanks for a firm producing boxes of oranges : Assume this firm is in a perfectly competitive market and the price is $35 Output Variable Total AVC AFC ATC MC for each box. (box) Cost Cost 0 1 2 3 4 $0 20 30 60 100 $10 - - - - 3.33 23.3 2.5 27.5 2. Calculate the profit at that quantity Short-run v. Long-run 1. Short-run: 2. Long-run: Questions 1 and 2 are based on the chart below, which gives a firm’s total cost of producing different levels of output. Output Total Cost 0 $13 1 20 2 25 3 28 4 32 5 43 6 60 1. The marginal cost of producing the fourth unit of output is (A) $ 4 (B) $11 (C) $19 (D) $32 (E) impossible to determine from the information given 2. The total variable cost of producing five units of output is (A) $ 6 (B) $11 (C) $30 (D) $43 (E) impossible to determine from the information given 3. The profit-maximizing level of output for this firm is (A) 2 (B) 3 (C) 4 (D) 5 (E) impossible to determine from the information given 4. If the marginal cost curve of a perfectly competitive firm shifts up, which of the following will occur to the firm’s price and output? 1. How many boxes should they produce? Why? Per-Unit vs. Lump-Sum* 1. Per-unit tax: 2. Lump-sum tax: (A) (B) Price Decrease Decrease Output Increase Decrease 5. A firm uses workers and seed to grow lettuce. Its output rises from 100 tons to 200 tons when the number of workers increases from 25 to 75. Its production process shows A. decreasing returns to scale B. diminishing returns to labor C. increasing returns to scale D. increasing returns to labor E. increasing long-run average cost 6. Which of the following is always true of the relationship between average and marginal costs? (A) Average total costs are increasing when marginal costs are increasing. (B) Marginal costs are increasing when average variable costs are higher than marginal costs. (C) Average variable costs are increasing when marginal costs are increasing. (D) Average variable costs are increasing when marginal costs are higher than average variable costs. (E) Average total costs are constant when marginal costs are constant. 7. If a perfectly competitive industry is in long-run equilibrium, which of the following is most likely to be true? (A) Some firms can be expected to leave the industry. (B) Individual firms are not operating at the minimum points on their average total cost curves. (C) Firms are earning a return on investment that is equal to their opportunity costs. (D) Some factors are not receiving a return equal to their opportunity costs. (E) Consumers can anticipate price increases. Name: _____________________________