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Problem Set #3
Instructions
1. Put away you pen and pencils
2. Put your name where it says “Graded
by:”
3. We will grade questions 1 and 4
4. After grading each question, write in
their score in the blank. ex: ( ____/5)
5. Follow the directions explicitly!
Questions #1:
Real World Examples
20 Points Total
A. Explicit and Implicit Costs
5 Point Total
1 Point- definition of explicit costs
(traditional out of pocket costs)
1 Point- Example showing explicit costs
(costs to a firm or a consumer)
1 Point- definition of implicit costs
(opportunity costs that a firm or person
must “pay” to themselves)
1 Point- Example showing implicit costs
(forgone wage, forgone time and effort)
1 Point- Clarity of examples (numeric
examples preferred)
B. Law of Diminishing Marginal Returns
5 Point Total
2 Points- Definition (As additional inputs
(workers) are added to fixed resources,
the additional output generated by each
new input will eventually fall.
2 Points- Example showing that
MARGINAL PRODUCT (additional
output from each new worker) will
eventually fall
1 Point (Clarity)- Numbers in example
(numbers show how marginal product
eventually falls)
C. Fixed, Variable, and Total Costs
5 Point Total
1 Point- definition of fixed costs (costs that
DO NOT change with the amount
produced)
1 Point- Example of a fixed costs/resource
1 Point- definition of variable costs (costs
that change with the amount produced)
1 Point- Example of a variable cost/resource
1 Point- Example showing that Total cost
equals fixed plus variable. (Numeric
example)
D. Economies of Scale and Diseconomies of Scale
5 Point Total
– 1 Point- definition of Economies of Scale
(area of LRATC where ATC is
decreasing)
– 1 Point- Example of Economies of Scale
– 1 Point- definition of Diseconomies of
Scale (area of LRATC where ATC is
increasing)
– 1 Point- Example of Diseconomies of
Scale
– 1 Point- Clarity of examples
2.a. Tony’s Hat Store
•
•
•
•
2 point for completing the chart
2 point for completing the graph
2 point for completing all definitions
4 points for answering all questions
• Each point(s) are ALL or NOTHING
2.b. “Cost and Competitive
Market Supply”
2.b. Cost and Competitive
Market Supply
Part A: ½ point each
1. -correctly completing the chart
-correctly completing the graph
-answer all questions
2. B. 7, $11, $7, $11, $4, $28
C. 4.5, $11, $6/5.50, $11, $5/5.50,
$22.50/24.75
D. 4, $6, loss, $1, loss, $4
Part B: ½ point each
A. Correctly complete the chart
B. Between 3 and 4, $6
C. Correctly complete the chart
D. MC, MC, AVC
4A. Correctly complete the chart
B. Answer the question
C. $8, 6,000 units, positive economic profit
D. increase, decrease, increase, decrease
E. $6, 4, 2,000 firms, 0, 8,000 units, minimum
F & G- Answer the questions
2.c. MP and MC
• 2 points for Explaining that the Marginal
Product curve is a mirrored image of the
Marginal Cost Curve. As MP increases
MC Decreases and as MP decreases, MC
increases.
• 1 point for stating that the shape of the
curves are because of the Law of
Diminishing Marginal Returns.
• 2 points for showing the MC curve using
numerical examples
Why is the MC curve U-shaped?
•The additional cost of the first 13 units produced falls because
workers have increasing marginal returns.
•As production continues, each worker adds less and less to
production so the marginal cost for each unit increases.
Workers Total Prod Marg Prod Total Cost Marginal Cost
0
0
$20
1
5
5
$30
10/5 = $2
2
13
8
$40
10/8 = $1.25
3
19
6
$50
10/6 = $1.6
4
23
4
$60
10/4 = $2.5
5
25
2
$70
10/2 = $5
6
26
1
$80
10/1 = $1013
3. Cory’s Surfboard Inc.
20 Points Total
3.The Chart
5 Point Total
1 Point 1 Point
1 Point
1 Point 1 Point
3.
A:
Plotted
Graph
5 Point Total
1 point- Correctly labeled axis with numbers
1 point- Correctly plotted MC
1 point- Correctly plotted ATC
1 point- Correctly plotted AVC
1 point- Correctly plotted AFV
MC
Cost/Price
ATC
AVC
AFC
Quantity
Question #3B
5 point total
• 1 point for stating an increase in the price of an
input (styrofoam) will increase resource costs
(MC increases or supply decreases)
• 2 points for stating that an increase in variable
costs will increase the MC, ATC and AVC
curves.
• 1 point for stating that an increase in a fixed
input (rent) will NOT change the MC curve
• 1 point for stating that an increase in fixed
costs will increase the ATC and AFC only.
Question 3.C.
5 Point Total
1 point- Output = 7 surfboards
1 point-Correctly placing the MR curve at $150
2 point- $65.71 Profit per Unit
1 point- Explanation- Cory is selling each unit for
$150 and his cost for each surfboard is $84.29.
OR
Total Profit equals TR ($1050)- TC ($590)= $460
$460 divided by 7 equals $65.71
4a. In-Class FRQ
12 Points Total
4a. 2005 FRQ
P
MC
ATC
P
D=MR
q
Firm
Q
4a. 2005 FRQ
P
MC
ATC
P
P
D=MR
q
Firm
Q
4a. 2005 FRQ
4a. 2005 FRQ
4a. 2005 FRQ
Check that it is UP to ATC
4a. 2005 FRQ
Check that it is UP to ATC
4a. 2005 FRQ
Check that it is UP to ATC
4a. 2005 FRQ
Check that it is UP to ATC
4a. 2005 FRQ
4a. 2005 FRQ
4a. 2005 FRQ
4a. 2005 FRQ