# Economics Homework Six Answers - Student Five

AnnaM

1. Fixed costs can be easily identified by seeing what the total costs are when output is _______. Separately, give an example of a variable cost.

Fixed costs are easily identified when the output is zero. Employees would be a variable cost.

Excellent. Could be a model answer.

2. The Lecture mentioned how a prior student in this course is paying her way through college by working as a waitress in a fancy Manhattan restaurant. Suppose her boss told her one day, "We were profitable last month. To increase our profits next month, I'm going to double our number of waitresses so that we can serve more people!" But our former economics student told him that his plan would fail because there is _____________ returns of scale in the restaurant, because more waitresses would result in more wasted time talking to each other and waitresses getting in the way of each other.

Diminishing marginal returns.

Right, except there is no such thing as "marginal returns." It is simply "decreasing returns to scale." (Minus 1).

3. Give an example of a "short run" cost for a firm, and give an example of a "long run" cost. This can refer to any type of firm, from a grocery store to a baseball team to a homeschool.

An example of a short run cost would be to hire an employee for a short amount of time, or hiring an employee to work overtime. An example of a long term cost would be buying better equipment or expanding the store.

Superb.

5. Earlier in this course we learned that someone who obtains a college degree earns, over the course of his life, about \$500,000 more than someone who does not. How can you explain this fact in terms of the advantages of "long run" costs over "short run" costs?

In the short run, college might seem very expensive, and not worth all the studying it requires. In the long run, however, you end up making more in your lifetime than you would have without a college degree. So, in the long run, college is a better choice.

Excellent.

SUBSTITUTE: 9. Suppose there is a sudden increase in the market price for a firm's widget. The firm will hire more employees to produce more output until the point where the value of its marginal product of labor equals its _____________.

Marginal return.

The value of its marginal product of labor always equals what you probably intend by your term "marginal return" (I think you mean "marginal revenue"). So that is not the answer, because it is always true. The answer is "wage rate" - the marginal COST for that marginal revenue. Nice try, though, and good effort. (Minus 2).

7. Suppose you own and drive a taxicab, and its annual license fee is \$1000 per year. Suppose you learn that the license fee will increase to \$1200 next year. Does this increase either increase, decrease, or have no effect on (a) marginal cost, (b) average variable cost, and (c) average total cost?

All three will increase.

Nope, only average total cost increases. The other two are functions of output. The license fee is independent of output (it is a fixed cost). (Minus 2).

8. Suppose you could earn \$8 an hour. Instead, you watch television for an hour. What is your accounting profit or loss, and what is your economic profit or loss, for that hour?

Your accounting loss would be \$8. You wouldn't lose anything in economic profit.

You have it backwards. (Minus 2). It's economic loss that includes opportunity cost. Accounting profit or loss is simply the cash flow.
63/70. Be sure to check the model answers after Sunday.--Andy Schlafly 20:02, 24 October 2009 (EDT)