Download Answers to Text Questions and Problems

Answers to Text Questions and Problems
Answers to Review Questions
1. The principle of increasing opportunity cost says that the least costly options should be exploited
first, with more costly options taken up only after the least costly ones have been exhausted. At low
prices, only those with low opportunity costs of producing the product would find it worthwhile to offer it
for sale. As prices rise, others with higher opportunity costs could profitably enter the market.
2. To build, or even rent, a new factory often takes years, certainly many months. By contrast,
additional production workers can be hired in days or, at most, weeks. So the factory is far more likely to
be a fixed factor over the next two months.
3. Not enough seeds for the plants needed to feed several billion people would fit in a single flower pot,
let alone develop into healthy plants with only a minuscule amount of soil available per seed.
4. False. An exception to the price = marginal cost rule occurs when market price is so low that total
revenue is less than variable cost when price equals marginal cost.
5. Diminishing marginal product makes short-run marginal cost rise; if additional workers add less and
less to total output, then the marginal cost of producing an additional unit of output must rise. Short-run
marginal cost is a mirror image of marginal product because, when marginal product reaches its
maximum, marginal cost is at its minimum. Similarly, when average product reaches its maximum,
average variable cost is at its minimum.
6. While average fixed cost always decreases as the quantity of output rises, average variable cost
decreases and then increases. So cost per unit of output does not continually decrease, but decreases and
then increases.
7. Minimum average variable cost occurs at a smaller quantity of output than minimum average total
cost because average total cost includes not only average variable cost but also average fixed cost, which
continually decreases as output rises.
8. A firm’s losses need never exceed its total fixed costs because a firm can always choose to shut
down (and incur only fixed costs) rather than continue production (and incur both fixed and variable
costs). A price-taking firm’s short-run supply curve is given by its short-run marginal cost curve above
minimum average variable cost because, if price were to fall below minimum average cost, the firm
would choose to shut down.
9. Minimum average cost is not always the profit-maximizing point for a firm; instead, the firm will
maximize profits by setting price equal to marginal cost.
10. To increase the quantity of output supplied when price rises, firms need to increase the amount of
inputs they buy. Because some inputs are fixed in the short run, the firm has fewer options than when it
tries to expand output in the long run, when all inputs are variable. So firms usually require larger price
increases to expand profitably in the short run.
Answers to Problems
1. If the price of a fossil is less than $6, Zoe should devote all her time to photography because when
the price is, say, $5 per fossil, an hour spent looking for fossils will give her 5($5) = $25, or $2 less than
she’d earn doing photography. If the price of fossils is $6, Zoe should spend one hour searching, will
supply 5 fossils, and will get $30 revenue, which is $3 more than she’d earn from photography. However,
an additional hour would yield only 4 additional fossils or $24 additional revenue, so she should not
spend any further time looking for fossils. If the price of fossils rises to $7, however, the additional hour
gathering fossils would yield an additional $28, so gathering fossils during that hour would then be the
best choice, and Zoe would therefore supply 9 fossils per day. Using this reasoning, we can derive a
price-quantity supplied relationship for fossils as follows:
Price of fossils ($)
0-5
6
7-8
9-13
14-26
27+
Number of fossils supplied
per day
0
5
9
12
14
15
If we plot these points, we get Zoe’s daily supply curve for fossils:
Price ($/fossil)
27
14
9
7
6
5
9 12 15
14
Number of fossils
2a.
Air conditioners/day
Total cost ($/day)
Marginal cost ($)
1
100
100
2
150
50
3
220
70
4
310
90
5
405
95
6
510
105
7
650
140
8
800
150
b. The marginal cost of each of the first 6 air conditioners produced each day is less than $120, but the
marginal cost of the 7th air conditioner is $140. So the company should produce 6 air conditioners per day.
c. There is no point at which marginal revenue (price) is exactly equal to marginal cost. Instead, the
firm produces as long as marginal revenue (price) exceeds marginal cost, and stops producing when
marginal revenue drops below marginal cost.
3a. As indicated by the entries in the last column of the table below, the profit-maximizing quantity of
bats for Paducah is 20 per day, which yields daily profit of $35.
b. Same quantity as in part (a), but now profit is $65, or $30 more than before.
Quantity
(bats/day)
0
5
10
15
20
25
30
35
Total Revenue
($/day)
0
50
100
150
200
250
300
350
Total labour cost
($/day)
0
15
30
60
105
165
240
330
Total cost
($/day)
60
75
90
120
165
225
300
390
Profit
($/day)
–60
–25
10
30
35
25
0
–40
4. A tax of $10 per day would decrease Paducah’s profit by $10 per day at every level of output. The
company would still maximize its profit by producing 20 bats per day. A tax that is independent of output
does not change marginal cost, and hence does not change the profit-maximizing level of output. But a
tax of $2 per bat has exactly the same effect as any other $2 increase in the marginal cost of making each
bat. As we see in the last column of the table below, the company’s profit-maximizing level of output
now falls to 15 bats per day. At that level it earns exactly zero profit, but at any other level of output it
would sustain a loss.
Quantity
(bats/day)
0
5
10
15
20
25
30
35
Total Revenue
($/day)
0
50
100
150
200
250
300
350
Total labour cost
($/day)
0
15
30
60
105
165
240
330
Total cost
($/day)
60
85
110
150
205
275
360
460
Profit
($/day)
–60
–35
–10
0
–5
–25
–60
–110
5a. Supply shifts right: if the increase in the price of honey leads to an increase in the quantity of honey
produced, it will also lead to an increase in the supply of beeswax, a by-product of honey production.
b. Supply shifts left: the price increase for cauliflower will lead at least some cabbage producers to
switch to cauliflower.
c. No change in supply: this will lead only to a movement along the supply curve.
6a. Supply shifts right. The discovery is a technological improvement. The improved technique would
enable more crops to be produced with the same inputs.
b. Supply shifts right. Fertilizer is an input; lower input prices shift the supply curve out.
c. Supply shifts right. The subsidy makes farming more profitable than before. Thus, those who were
employed in a job that was just a little better than being a farmer would switch to farming.
7.
(a) The supply elasticity of Basmati rice will be higher in the long run for the reason given.
8. The expression for supply elasticity is (P/Q)(1/slope). Since the slope of this supply curve is 2/3, the
elasticity of supply at A is (4/9)(3/2) = 2/3. The elasticity at B is (6/12)(3/2) = 3/4.
9. The market supply curve (right) is the horizontal summation of the supply curves of the individual
market participants (left and centre).
P
P=2Q
6
P
1
P=2+Q2
6
P
6
4
4
4
2
2
2
1
2
3
Q1
2
S
4 Q2
1
4
7
Q
Horizontal summation means holding price fixed and adding the corresponding quantities. To derive the
market supply curve algebraically, solve each individual supply curve for quantity and add. Pay careful
attention to the region for which the supply curves don’t overlap (here, the region P < 2). From P = 2Q1,
get Q1 = P/2; from P = 2 + Q2, get Q2 = P – 2. For the region P < 2, the market supply is the same as firm
1’s supply Q = P/2, or P = 2Q. For P > 2 we add Q1 + Q2 to get Q = P/2 + (P – 2), which reduces to Q =
(3P/2) – 2. Rewriting this, we have P = (4/3) + (2/3)Q for P > 2. Expressed algebraically, the market
supply curve is thus P = 2Q for P < 2 and P = (4/3) + (2/3)Q for P > 2.
10a. Labour can be considered a fixed cost for Slap-Shot, since it is required to provide severance pay
even if it produces nothing.
b. Both companies have the same shutdown price; their fixed costs differ, but only variable costs
matter in determining whether to shut down.
c. Slap-Shot will suffer the greater loss, since it has higher fixed costs.
11a. An employer would operate at a loss if price were higher than average variable cost, so that the firm
could cover its variable costs and at least some of its fixed costs.
b. (i) If the union is convinced that the employer will move the factory no matter what, then it can
bargain for increased wages. The employer is currently able to cover half of its fixed costs, and would not
shut down unless its losses were equal to its fixed costs. The union could thus bargain for an increase in
wages of just less than $1 million.
(ii) If the employer might choose to stay, then the union has less room to bargain for increased
wages now, since that would increase the employer’s losses and raise the probability that the employer
will move the factory.
12. The profit-maximizing level of output at a price of $2.50/slice is 570 slices/day, and the producer
will earn ($2.50/slice – $1.40/slice) × 570 slices/day = $627/day.
13. The profit-maximizing level of output at a price of $0.80/slice is 360 slices/day, and the producer
will earn ($0.80/slice – $1.03/slice) × 360 slices/day = –$82.80/day.
14. The profit-maximizing level of output at a price of $0.50/slice is 0 slices/day; the producer is better
off shutting down and paying only the fixed cost. Fixed cost is the difference between total cost and
variable cost, which is ($1.18/slice – $0.68/slice) × 260 slices/day = $130/day. Profit is therefore
–$130/day.
15. The profit-maximizing level of output at a price of $1.18/slice is 435 slices/day. Profit is total
revenue minus total cost, where total cost is variable cost plus fixed cost. Total revenue is $1.18/slice ×
435 slices = $513.30/day, variable cost can be determined from the diagram as $0.77/slice × 435 slices =
$334.95/day, and fixed cost was determined in question 14 as being equal to $130/day. Profit is therefore
equal to $513.30/day – $334.95/day – $130/day = $48.35/day.
Sample Homework Assignment
1.
Assume you can either work making $6 per hour in the university bookstore, or you can open your
own fruit stand and sell fruit according to the following table. You must decide how much time each
day to spend on each activity (up to 8 hours total). Use the information in the table below to
determine how you will allocate your time if you earn $0.50 for each piece of fruit sold.
Hours selling fruit
1
2
3
4
5
6
7
8
Quantity of fruit sold
20
38
54
68
78
88
96
99
3. You and your roommates (Lynese and Cedric) must provide cooking and cleaning for your
household. The following table shows how many hours it takes each person to produce one unit of
cooking or one unit of cleaning.
You
Lynese
Cedric
a.
b.
Time to produce 1 unit of
cooking
2 hours
3 hours
5 hours
Time to produce 1 unit of
cleaning
3 hours
5 hours
1 hour
If each person has 15 hours per week to devote to household cooking and cleaning, draw the
individual production possibilities curves if each person does their own cooking and cleaning.
Draw the supply curve for cooking in your household, where the vertical axis represents the price of
cooking in terms of cleaning, if you and your roommates can choose between providing your own
cooking and cleaning, and paying a service to do it.
Multiple Choice Quiz
1.
a.
b.
c.
d.
e.
A firm’s profit is equal to which of the following?
The value of its sales.
Marginal revenue minus marginal cost.
Total sales minus wages.
Total revenue minus total cost.
None of the above.
2.
a.
b.
c.
d.
e.
Which of the following is not a characteristic of a price taker?
Perfectly elastic demand curve.
Market price is given.
Control over market price.
Many sellers.
All of the above are characteristics of price takers.
3.
a.
b.
c.
d.
e.
Which of the following can a firm vary in the long run?
No factors of production.
All factors of production.
All but one factor of production.
Only one factor of production.
More information about the firm is needed to answer this question.
4.
a.
b.
c.
d.
e.
When the quantity of an input can be changed in the short run, the input is
fixed.
variable.
implicit.
explicit.
efficient.
5.
a.
b.
c.
d.
e.
If marginal product is less than average product, then
average product is rising.
average product is falling.
marginal product is at its maximum.
average product is at its maximum.
marginal product equals average product.
6.
a.
b.
c.
d.
e.
A price taker will maximize profit when
total revenue exceeds total cost.
marginal revenue exceeds marginal cost.
price equals marginal cost.
price equals marginal benefit.
marginal benefit exceeds marginal cost.
7.
a.
b.
c.
d.
e.
A firm will shut down when
it is not earning a profit.
price does not equal marginal cost.
price is less than average total cost.
total revenue is less than variable cost.
total revenue is less than total cost.
8.
a.
b.
c.
d.
e.
An increase in supply could be caused by which of the following?
An improvement in technology.
An increase in input prices.
An increase in income.
An increase in the price of the product.
A decrease in the number of suppliers.
9.
a.
b.
c.
d.
e.
Which of the following is true for a vertical supply curve?
Price elasticity of supply is perfectly elastic.
Quantity supplied is very responsive to price changes.
Price elasticity of supply is inelastic.
Price elasticity of supply is infinite.
Quantity supplied is negatively related to price.
10.
a.
b.
c.
d.
e.
Which of the following would cause supply to be more inelastic?
Production that requires unskilled labour.
Improved transportation of inputs.
Moving from the short run to the long run.
A unique or essential input.
None of the above would cause supply to be more inelastic.
Problems/Short Answer
1.
Assume you can either work as an economics tutor on campus for $18 per hour or work in your own
business making university t-shirts. You must decide how much time each day to spend on each
activity (up to 8 hours total). Use the information in the table below to determine how you will
allocate your time if you earn $5 for each t-shirt.
Hours per day
1
2
3
4
5
6
7
8
2.
Assume you and your friend Keiko each work for your own businesses solving economics and math
problems. The table below shows how many hours it takes each of you to solve each type of
problem.
You
Keiko
a.
b.
c.
Number of t-shirts
6
11
15
18
21
23
25
26
Time to solve 1 economics
problem
1 hour
4 hours
Time to solve 1 math
problem
2 hours
1 hour
If each of you works 8 hours per day, draw the individual production possibilities curves for you and
Keiko.
What is the price of an economics problem in terms of math problems for you and Keiko?
A firm is willing to pay for economics problems. Graph the supply curve for economics problems,
where the vertical axis represents the price of economics problems in terms of math problems.
Answer Key to Extra Questions in Instructor’s Manual
Sample Homework Assignment
1. The additional fruit sold for each hour is 20, 18, 16, 14, 10, 10, 8, 3. The fruit sells for $0.50, so the
income earned for each hour spent selling fruit is $10, 9, 8, 7, 5, 5, 4, 1.50. Selling fruit exceeds the
income from the alternative ($6) for the first 4 hours. Therefore, you will spend 4 hours selling fruit and 4
hours working in the university bookstore.
2a. 4/20 (1/0.1) = 0.2 (10) = 2
b. For every 1% change in price, quantity supplied changes by 2%, so a 10% increase in price leads to
a 20% increase in quantity supplied.
c. In each case, the change increases the price elasticity of supply (makes supply more elastic.)
3a.
Cooking
you
7.5
5
Lynese
Cedric
3
3
5
15
Cleaning
b.
Price of cooking
in terms of
cleaning
Supply of cooking
5
3/5
2/3
7.5
12.5
15.5 Quantity of cooking
Multiple Choice
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
d
c
b
b
b
c
d
a
c
d
Problems/Short Answer
1. Additional output for each hour = 6, 5, 4, 3, 3, 2, 2, 1. The additional amount earned for each hour =
30, 25, 20, 15, 15, 10, 10, 5. You will make t-shirts as long as the amount earned is greater than $18 (the
amount earned tutoring). You therefore will spend 3 hours making t-shirts and 5 hours tutoring, for a total
of 8 hours.
2a.
Econ
problems
8
you
Keiko
2
4
8
Math problems
b. For you, the price of economics problems in terms of math problems is 1/2. For Keiko, the price of
economics problems in terms of math problems is 4.
c.
Price
Supply of economics problems
4
1/2
8
10
Quantity