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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: _____________________________