# Economics Homework Six Answers - Student Sixteen

Jenn V.
Economics
Week 6 HW

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. An example of a variable cost is chlorine for a pool-service company. The more pools that are serviced, the more revenues, which equals to more chlorine being bought.

Good answer to the second half (variable costs), but how about the first? (The answer is "when output is ZERO.") (Minus 1).

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. The employee’s plan would fail because there is diminishing returns of scale in the restaurant.

Correct, but say "decreasing" returns of scale. It's not necessarily "diminishing" as in "diminishing marginal utility."

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 for a grocery store would be the manager hiring two extra employees to work two extra checkout lanes to provide quicker assistance to the customers. An example of a long run cost would be the manager replacing his slower workers with faster, more reliable cashiers. If he hired the two extra cashiers, he would have to pay them and lose proft. Meanwhile, he could just fire Frank and Kate, who are slower at checking out the customers, and replace them with Scott and Mike, who are a lot faster and get the job done in a timely manner. The manager’s store would be upgraded, without providing the two extra paychecks.

Excellent.

SUBSTITUTE: 12. (Difficult, but try): Your firm seeks to produce a certain level of output in the most efficient way (the lowest cost). It should use its resources in which of the following ways: (a) use materials that generate the highest marginal product (b) use materials that have increasing returns to scale (c) use as much material as possible until there are diminishing returns (d) use resources such that their marginal products per unit cost are equal. The answer is (B). As one input increases, with other inputs fixed, the resulting increase in output is larger and larger; Therefore, bringing in more money to your business.

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? The long run for the person going to college is the cost of college tuition in the hopes of a lifetime career; but if person does not go to college, he is stuck with a lifetime dead end career, possibly only making minimum wage. If he went to college and paid the cost of college, the ending result of getting a much better job would pay off all those tuition fees.

Excellent.

6. Suppose you spent one million dollars to build your factory, and another million dollars for materials and labor and electricity to make 50 cars. What is your fixed cost, average variable cost, and average total cost? Now suppose it costs you \$18,000 to make a 51st car. What is your marginal cost? It costs one million dollars to build the factory, which equals the fixed cost. It costs \$20,000 to make one car out of 50, one million dollars to make 50 cars all together. This is the average variable cost because it costs an average of \$20,000 to make a single car. The marginal cost is \$1,018,000, with an average cost of \$19,960 to make the 51st car.

Right about fixed cost and average variable cost. Wrong about average total cost and marginal cost. Marginal cost, for example, is ONLY the cost for making the additional unit: \$18,000. (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? With (a) marginal cost, it increases. With (b) average variable cost, it has no effect. Lastly, with (c) average variable cost, it increases.

(a): no effect, see explanation to prior question. Rest is correct. (Minus 1).

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? Because you are sitting home and doing nothing productive, your accounting profit is \$0. Technically there is no loss, because you are not losing anything by watching TV. However, giving up that one hour of television could give you an economic profit of \$8.

Right, but describe it as an economic loss of \$8 for watching TV rather than doing something productive.
66/70, with some good answers.--Andy Schlafly 21:30, 25 October 2009 (EDT)