30 Jan The Jerry-Berry Ice Cream

Week 3 Homework

Question 1

Maryland farmers turn from tobacco to flowers

Maryland tobacco farmers will be subsidized if they switch from growing tobacco to growing crops such as flowers and organic vegetables.

Source: The New York Times ,February 25, 2001

How does offering farmers a payment to exit tobacco growing influence the opportunity cost of growing tobacco?

What is the opportunity cost of using the equipment owned by a tobacco farmer?

______________________

Offering farmers a payment to exit tobacco growing _______ the opportunity cost of growing tobacco.

The opportunity cost of using the equipment owned by a tobacco farmer is _______.

?increases; the next best alternative? forgone, which could be the production of flowers and organic vegetables

?increases; the implicit cost of using the tobacco equipment

?decreases; the explicit cost of using the tobacco equipment

?decreases; the sum of the implicit and explicit costs of using the tobacco equipment

does not? change; the next best alternative? forgone, which could be the production of flowers and organic vegetables

Question 2

Perfect competition is characterized by all of the following EXCEPT

firms produce an identical product.

no restrictions on entry into or exit from the industry.

buyers and sellers are well informed about prices.

a large number of buyers and sellers.

considerable advertising by individual firms.

Question 3

Which of the following illustrates economies of scale, diseconomies of scale, and constant returns to scale?

Liza’s average total cost changes from $4.50 to $2.20 when she increases salad production from 7 to 9 an hour.

Sam’s average total cost changes from $1.30 to $2.80 when he increases smoothie production from 5 to 8 gallons an hour.

Tina’s average total cost remains at $3 when she increases pizza production from 12 to 13 an hour.

Sam faces economies of? scale; Liza faces diseconomies of? scale; Tina faces constant returns to scale.

Sam faces economies of? scale; Tina faces diseconomies of? scale; Liza faces constant returns to scale.

Tina faces economies of? scale; Sam faces diseconomies of? scale; Liza faces constant returns to scale.

Liza faces economies of? scale; Sam faces diseconomies of? scale; Tina faces constant returns to scale.

Question 4

Jennifer owns a pig farm near Salina, Kansas. Last year she earned $39,000 in total revenue while incurring $38,000 in explicit costs. She could have earned $27,000 as a teacher in Salina. These are all her revenue and costs. Therefore Jennifer earned an

economic profit of $1,000.

accounting profit of $1,000 but incurred an economic loss of $65,000.

None of the above answers is correct.

accounting profit of $1,000 but incurred an economic loss of $26,000.

accounting profit of $1,000 but incurred an economic loss of $38,000.

Question 5

The main source of economies of scale is

reductions in the price of factors of production.

the ability to hire less labor.

increasing average costs.

decreasing marginal product.

greater specialization of both labor and capital.

Question 6

Jennifer’s Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should

produce this batch of cookies because their MR exceeds their MC.

produce this batch of cookies because they will help lower her average fixed cost.

not produce this additional batch.

charge $120 for this batch.

shut down.

Question 7

Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna’s total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her average total cost equals

$10.00.

$1,200.

$300.

$2,400.

$12.00.

Question 8

As a typical firm increases its output, its marginal cost

is constant.

increases at first and then decreases.

is negative at first and then positive.

decreases.

decreases at first and then increases.

Question 9

To produce more output in the short run, a firm must employ more of

its fixed resources.

Firms cannot produce more output in the short run.

its variable resources.

all its resources.

the least costly resources regardless of whether they are fixed or variable.

Question 10

The market demand curve in a perfectly competitive market is ________ and the demand curve for a perfectly competitive firm’s output is ________.

horizontal; horizontal

downward sloping; horizontal

downward sloping; downward sloping

downward sloping; upward sloping

horizontal; downward sloping

Question 11

The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. Omar’s total profit is maximized when he produces ________ bushels of rutabagas.

7

5

6

3

8

Question 12

If concerns about mad-cow disease impose economic losses on the perfectly competitive cattle ranchers, exit by the ranchers combined with no further changes in the demand for beef will force the price of beef to

fluctuate, with the trend being lower prices.

probably change, but more information about the market supply of beef is needed to answer the question.

decrease.

not change.

increase.

Question 13

Kenya owns a lawn mowing company. His total product schedule is in the above table. Decreasing marginal returns first occur with the

third worker.

second worker.

first worker.

fourth worker.

fifth worker.

Question 14

The above figure illustrates a perfectly competitive firm. If the market price is $10 a unit, to maximize its profit (or minimize its loss) the firm should

produce 30 units.

produce more than 30 units and less than 40 units.

shut down.

produce 40 units.

produce between 10 and less than 30 units.

Question 15

Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna’s total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her average fixed cost equals

$2,400.

$6.00.

$10.00.

$7.50.

$600.

Question 16

When an economist uses the term “cost” referring to a firm, the economist refers to the

price of the good to the consumer.

explicit cost of producing a good or service but not the implicit cost of producing a good or service.

implicit cost of producing a good or service but not the explicit cost of producing a good or service.

cost that can be actually verified and measured.

opportunity cost of producing a good or service, which includes both implicit and explicit cost.

Question 17

Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna’s total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average fixed cost equals

$7.50.

Correct Answer

$2.50.

You Answered

$6.00.

$600.

$10.00.

Question 18

U.S. Steel Lays Off 756

With a drop in the demand for steel pipe and tube, U.S. Steel Corporation will idle plants in Ohio and Texas and lay off 756 workers.

Source: The Wall Street Journal , January 6, 2015

As U.S. Steel responded to the fall in demand, how did its marginal cost change?

What can you say about minimum AVC in the plants that closed?

________________

As U.S. Steel responded to the fall in demand, its marginal cost ______.

The minimum average variable cost in the plants that closed must have been ______.

?decreased; greater than the market price

?decreased; less than the market price

?decreased; equal to average fixed cost

?increased; less than the market price

?increased; greater than the market price

Question 19

The law of decreasing returns states that as a firm uses more of a

fixed input and a variable input, the marginal product of the fixed input and the marginal product of the variable input both decrease.

fixed input, with a given quantity of variable inputs, the marginal product of the fixed input eventually decreases.

variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases.

variable input, output will begin to fall immediately.

variable input, total output will increase indefinitely.

Question 20

GM cuts jobs at its Australian manufacturing unit

GM will cut 500 jobs, or about 12% of its workforce, at its Australian plant because of a sharp fall in demand for its locally-made “Cruze” small car.

Source: The Wall Street Journal , April 8, 2013

As GM cuts its workforce, how will the marginal product and average product of a worker change in the short run?

Suppose that before the cuts the marginal product of GM workers is below their average product.

________________________

As the number of workers decreases, the marginal product of a GM worker ______ and the average product of a GM worker ______ in the short run.

does not? change; does not change

?decreases; increases

You Answered

?increases; decreases

Correct Answer

?increases; increases

?decreases; decreases

Question 21

Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her total variable cost of producing four pizzas per hour is

Some amount, but more information is needed to determine this total variable cost.

$49.

$20.

$71.

$51.

Question 22

Airlines seek new ways to save on fuel as costs soar

Fuel is an airline’s biggest single expense. In 2008, the cost of jet fuel rocketed. Airlines tried to switch to newer generation aircraft, which have more fuel-efficient engines.

Source: The New York Times , June 11, 2008

Explain how a technological advance that makes airplane engines more fuel efficient changes an airline’s average variable cost, marginal cost, and average total cost.

A technological advance that makes an airplane engine more fuel efficient ______ an airline’s average variable cost and ______ an airline’s marginal cost.

You Answered

?increases; increases

?decreases; does not change

does not? change; decreases

Correct Answer

?decreases; decreases

Question 23

Labor (workers) Output (bikes) Total fixed costs (dollars) Total variable cost (dollars) Total cost (dollars)

0 0 200 ? ?

1 20 ? 100 ?

2 50 ? ? ?

3 60 ? ? ?

4 64 ? ? ?

The table above gives costs at Jan’s Bike Shop. Unfortunately, Jan’s record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total fixed cost of producing 64 bikes?

$200

$500

$300

$400

$600

Question 24

California’s commercial drone industry is taking off

Customers are finding ever more creative ways to use drones, and 3E Robotics Inc., America’s largest producer of consumer drones, expects sales to soar.

Source: Los Angeles Times, June 13, 2015

Explain what is happening in the market for commercial drones.

How would you expect the price of a drone to change in the short run and the long run?

How would you expect the economic profit of a drone producer such as 3D Robotics to change in the short run and in the long run?

_________________

In the short run, the equilibrium price of a drone _______ and the economic profit of drone producers _______.

?falls; decreases

?rises; increases

?rises; remains unchanged

?falls; remains unchanged

Question 25

Coffee king Starbucks raises its prices

Starbucks will raise its price because the wholesale price of milk has risen by nearly 70% in the past year. There’s a lot of milk in those Starbucks lattes, noted John Glass, CIBC World Markets restaurant analyst.

Source: USA Today, July 24, 2007

Is the cost of milk a fixed cost or a variable cost?

Describe how the increase in the price of milk changes Starbucks’ short-run cost curves.

____________________

The cost of milk is a ______ cost. An increase in the cost of milk shifts the ______ curves upward.

??variable; total? cost, total variable? cost, and total fixed cost

??fixed; average total? cost, average fixed? cost, total? cost, and total fixed cost

??fixed; total cost and average total cost

??variable; average total? cost, average variable? cost, total? cost, total variable? cost, and marginal cost

Question 26

The long run is a time period that is

five years or longer.

None of the above answers describes the long run.

long enough to change the amount of labor employed but not to change the size of the plant.

long enough to change the amount of labor employed.

long enough to change the size of the firm’s plant and all other inputs.

Question 27

A perfectly competitive firm is producing 50 units of output, which it sells at the market price of $23 per unit. The firm’s average total cost is $20. What is the firm’s total revenue?

$1,150

$1,000

$150

$23

$20

Question 28

Metropolitan Museum completes round of layoffs

The museum cut 74 jobs and 95 other workers retired. The museum also laid off 127 other employees in its retail shops. The cut in labor costs is $10 million, but the museum expects no change in the number of visitors.

Source: The New York Times, June 22, 2009

Explain how the job cuts and shop closings will change the museum’s short-run average cost curves and marginal cost curve.

______________________

A cut in labor but no change in output increases the marginal product of labor.

What is the effect on the marginal cost curve?

A rightward movement along the marginal cost curve occurs.

The marginal cost curve shifts upward.

A leftward movement along the marginal cost curve occurs.

The marginal cost curve shifts downward.

Question 29

Kenya owns a lawn mowing company. His total product schedule is in the above table. The marginal product of the fourth worker is ________ lawns mowed per week.

25

5

20

80

320

Question 30

The Jerry-Berry Ice Cream Shoppe’s total cost schedule is in the above table. Based on the table, the marginal cost of producing the fourth gallon of ice cream is

$5.

$3.

$8.

$2.

$32.