A. What is the firm’s total cost function? Average cost?

EXERCISES

1.1. Joe quits his computer-programming job, where he was earning a salary of $50,000 per year to start . He opens his own computer software business store in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the following expenses: mortgage $18,000, salary paid to himself $40,000, rent, $0, and other expenses $25,000. Find the accounting cost and the economic cost associated with Joe’s computer software business.

The accounting cost represents the actual expenses, which are 18,000+$40,000+$0 + $25,000=$8365,000. The economic cost includes accounting cost, but also takes into account opportunity cost. Therefore, economic will include, in addition to accounting cost, an extra $246,000 because he Joe gave up $624,000 by not renting the building ($24,000-$18,000), and an extra $10,000 because he paid himself a salary gave up $10,000 below market on his salary ($50,000-$40,000). Economic cost is then $99,000.

2.2. a. Fill in the blanks in the following table.

B. Draw a graph that shows marginal cost, average variable cost, and average total cost, with cost on the vertical axis and quantity on the horizontal axis.

Average total cost is u-shaped and reaches a minimum at an output of 7, based on the above table. Average variable cost is u-shaped also and reaches a minimum at an output of 3. Notice from the table that average variable cost is always below average total cost. The difference between the two costs is the average fixed cost. Marginal cost is first diminishing, to a quantity of 3 based on the table, and then increases as q increases. Marginal cost should intersect average variable cost and average total cost at their respective minimum points, though this is not accurately reflected in the numbers in the table. If the specific functions had been given in the problem instead of just a series of numbers, then it would be possible to find the exact point of intersection between marginal and average total cost and marginal and average variable cost. The curves are likely to intersect at a quantity that is not a whole number, and hence are not listed in the above table.

3.3. A firm has a fixed production costs of $5,000 and a constant marginal cost of production of equal to $500 per unit produced.

a. What is the firm’s total cost function? Average cost?

The variable cost of producing an additional unit, marginal cost, is constant at $500, so , and Fixed cost is $5,000 and average fixed cost is . The total cost function is fixed cost plus variable cost or TC=$5,000+$500q. Average total cost is the sum of average variable cost and average fixed cost:

Date: 2015-12-24; view: 1003