# Economics Homework Six Answers - Student Eight

Economics Homework 6

Duncan B.

1. You can easily determine your fixed cost by examining your costs when output is zero; you are not using any funds to actually produce any widgets, but you still have costs: your fixed costs.

Right, but you overlooked the second part of the question: provide an example of variable costs. (Minus 1)

2. Diminishing returns to scale.

Correct, but say DECREASING returns to scale. It's not "diminishing", as in the very different concept of "diminishing marginal utility."

3. A family's short run cost for a broken computer is a computer repairman. A long term cost is a whole new computer.

Superb, and good wikifying.

4. Your marginal cost to fix a car is \$4: each mechanic can fix three cars an hour while being paid \$12 an hour. Your marginal product is 3: 12 cars/4 employees.

Right, but put some units on the MP=3: 3 cars per hour of labor. You overlooked that the question asked about the minimum marginal revenue (\$4 per car). (Minus 1). Be sure to read carefully, and reread if necessary, each question so you don't lose points that you could have easily earned.

5. Long run costs are always more beneficial and less expensive than short run costs, as the former are major changes while the latter are just minor adjustments. Four years of higher education may seem useless at the time, but later it pays off in the form of a better job.

Right.

6. Your fixed cost is \$1 million: the amount needed to build the factory. Your average total cost is \$2 million/50 cars=\$40,000: the total cost of producing 50 cars. Your average variable cost is \$1 million/50=\$20,000: the costs actually needed to make the cars. Your marginal cost is \$1,018,000/51=\$19960.

All correct except the last. Your marginal cost (MC) is simply the cost of the last additional unit: \$18,000. (Minus 1).

7.a. This increases marginal costs.

b. This does nothing to variable costs, which do not include fixed costs.

c. This gives you more fixed costs, which increases total cost.

(a) is incorrect. Marginal costs is simply the last additional unit of output (in this case, the last taxicab ride). (Minus 1). (b) and (c) are correct.

8. Your accounting profit is \$0, because accounting profit does not include opportunity costs. Your economic profit is -\$8: the opportunity cost for the hour.

Excellent.

9. Marginal cost of labor.

Superb, the first to answer this correctly! More simply, the "marginal cost of labor" is the wage rate.

10. As inflation increases, money's value decreases. With 10% inflation each year, the value of a dollar decreases \$0.30, \$0.10 a year. A \$10 good whose price remains the same over the three years seems like it remained at the same price, but if the good's price increases by less than the CPI increase (caused by inflation), the real price decreases.

Right. (The 10% decrease in real price each year is only approximately a 30% decrease overall.)

11. Long run average costs are always lower than short term average costs because you have to pay a certain amount just to construct a facility, hire workers, buy machinery, and produce your first product. The average costs include all costs, so as you make more and do not have as many fixed costs, your average cost decreases.

Right, but the explanation could be clearer.

12. B is correct. You want maximum efficiency to produce the 1000 widgets, and you can best achieve that by increasing your returns to scale. If you double your production facilities and get more than double the output, you produce them faster and more cheaply.

Nope, the correct answer is (D). (Minus 1). See model answers when available (after Sunday).
Some great answers. 105/110.--Andy Schlafly 22:30, 24 October 2009 (EDT)