Principles of Microeconomics 1 Problem Set Number 9

FRAMINGHAM STATE COLLEGE

PRINCIPLES OF MICROECONOMICS
PROBLEM SET NUMBER 9
My Name is? ________________________________________

Using the material covered in CHAPTER 13.

3. Chapter 13 discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost,
average total cost, and marginal cost. Fill in the type of cost that best completes each phrase
below:

a. The true cost of taking some action is its opportunity cost.

b. Average total cost is falling when marginal cost is below it, and rising when marginal cost
is above it.

c. A cost that does not depend on the quantity produced is a fixed cost.

d. In the ice-cream industry in the short run, variable cost includes the cost of cream and
sugar, but not the cost of the factory.

e. Profits equal total revenue less total cost.

f. The cost of producing an extra unit of output is the marginal cost.


4. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000
per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per
year job as an accountant.

a. Define opportunity cost.

The opportunity cost of something is what must be forgone to acquire it.



b. What is your aunt's opportunity cost of running a hardware store for a year?


The opportunity cost of running the hardware store is $550,000, consisting of $500,000 to rent the store
and buy the stock and a $50,000 opportunity cost, since your aunt would quit her job as an accountant to
run the store.

Principles of Microeconomics 2 Problem Set Number 9


c. If your aunt thought she could sell $510,000 worth of merchandise in a year, should she
open the store? Explain.


Since the total opportunity cost of $550,000 exceeds revenue of $510,000, your aunt should not open the
store, as her profit would be negativeshe would lose money.

5. Nimbus, Inc., makes brooms and then sells them door-to-door. The relationship between the
number of workers and Nimbus's output in a given day is given in the following table:

Workers Output
Marginal
Product
Total Cost
Average
Total Cost
Marginal
Cost
0 0 --- $200 --- ---
1 20 20 300 $15.00 $5.00
2 50 30 400 8.00 3.33
3 90 40 500 5.56 2.50
4 120 30 600 5.00 3.33
5 140 20 700 5.00 5.00
6 150 10 800 5.33 10.00
7 155 5 900 5.81 20.00

a. Fill in the column of marginal products.
What pattern do you see?



Marginal product rises at first, then declines

How might you explain it?
because of diminishing marginal product.

b. A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to
fill in the column for total cost. Fill in the column for average total cost. (Recall that ATC
= TC / Q.) What pattern do you see?

See table for average total cost. Average total cost is U-shaped. When quantity is low, average total cost
declines as quantity rises; when quantity is high, average total cost rises as quantity rises.
Principles of Microeconomics 3 Problem Set Number 9
c. Now fill in the column for marginal cost. (Recall that MC = TC / Q.) What pattern do
you see?


See table for marginal cost. Marginal cost is also U-shaped, but rises steeply as output increases. This is
due to diminishing marginal product.


d. Compare the column for marginal product and the column for marginal cost. Explain the
relationship.


When marginal product is rising, marginal cost is falling, and vice versa.


e. Compare the column for average total cost and the column for marginal cost. Explain the
relationship.


When marginal cost is less than average total cost, average total cost is falling; the cost of the last unit
produced pulls the average down. When marginal cost is greater than average total cost, average total
cost is rising; the cost of the last unit produced pushes the average up.