08 Jun Question HOMEWORK: CHAPTER 7
Question
HOMEWORK: CHAPTER 7
1. Which of the following are short-run and which are long-run adjustments?
a. Wendy’s builds a new restaurant.
b. Harley-Davidson Corporation hires 200 more production workers.
c. A farmer increases the amount of fertilizer used on his corn crop.
d. An Alcoa aluminum plant adds a third shift of workers.
2. List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1000 miles to Florida for spring break. Which costs—fixed, variable, or both—would you take into account in making your decision? Would any implicit costs be relevant? Explain
3. A firm has fixed costs of $60 and variable costs as indicated in the table at the bottom of this page. Complete the table.
Total Product TFC TVC TC AFC AVC ATC MC
0 $ $ 0 $ – – – –
1 45 $ $ $ $
2 85
3 120
4 150
5 185
6 225
7 270
8 325
9 390
10 465
a. Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the variable-cost and total-cost curves.
b. Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and their relationships to one another. Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and the ATC curves at their minimum points.
c. Explain how the location of each curve graphed in question 3b would be altered if (1) total fixed cost had been $100 rather than $60 and (2) total variable cost had been $10 less at each level of output.
4. Indicate how each of the following would shift the (1) marginal-cost curve, (2) average-variable-cost curve, (3) average-fixed-cost curve, and (4) average-total-cost curve of a manufacturing firm. In each case specify the direction of the shift. LO3
a. A reduction in business property taxes.
b. An increase in the nominal wages of production workers.
c. A decrease in the price of electricity.
d. An increase in insurance rates on plant and equipment.
e. An increase in transportation costs
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