Worksheet - Chapter One



Review Questions

Production and Costs

1. Answer the following questions about cost curves:

a. Why must the marginal cost curve always cut the average variable cost curve and the average total cost curve at the lowest points of those curves?

b. What is the relationship between the law of diminishing marginal returns and the slope of the marginal cost curve?

c. What is the relationship between the law of diminishing marginal returns and the curvature of the average variable cost curve?

2. The Preservation Embalming Company’s cost data have been partially entered in the table below. Following the sudden and unexpected death of the company’s accountant, you are called to fill in the missing entries.

|Bodies Embalmed | | |Variable Cost | | | | |

| |Total Cost |Fixed Cost | |ATC |AVC |AFC |MC |

|0 | |40 | |--- |0 |--- |--- |

|1 | | |6 | | | | |

|2 | | |11 | | | | |

|3 | | |15 | | | | |

|4 |60 | | | | | | |

|5 |66 | | | | | | |

3. You are given the following information about Rubber Duckies, Inc., a firm which manufactures rubber boats:

|Labor |Output |Marginal OUTPUT |Average OUTPUT |

|Workers Hired per Week |Rubber Boats per Week | | |

|1 |1 | | |

|2 |2 | | |

|3 |5 | | |

|4 |7 | | |

|5 |11 | | |

|6 |14 | | |

|7 |16 | | |

|8 |17 | | |

|9 |18 | | |

|10 |18 | | |

a. Calculate marginal output and average output.

b. What is the relationship between average product and marginal product at output rates below 16 boats per week? Why? What is the relationship between average product and marginal product at output rates above 16 boats per week? Why?

c. Assuming that labour costs $400 per week, and total fixed costs are $10,000 per week, calculate the firms total cost, total variable cost, and total fixed cost. PLOT THESE ON ONE GRAPH.

|Labor |Output |Fixed Cost |Variable Cost |Total Cost |Average Fixed |Average variable|Marginal Cost |

|Workers Hired per |Rubber Boats per | | | |Cost |Cost | |

|Week |Week | | | | | | |

|1 |1 | | | | | | |

|2 |2 | | | | | | |

|3 |5 | | | | | | |

|4 |7 | | | | | | |

|5 |11 | | | | | | |

|6 |14 | | | | | | |

|7 |16 | | | | | | |

|8 |17 | | | | | | |

|9 |18 | | | | | | |

|10 |18 | | | | | | |

Calculate the firm’s average fixed cost, average variable cost, and marginal cost.

PLOT THESE ON ANOTHER GRAPH.

d. If total fixed cost is $11,000 per week, how does this affect the firms AFC, AVC, and MC curves from part (c)? Calculate the cost curves.

|Labor |Output |Fixed Cost |Variable Cost |Total Cost |Average Fixed |Average variable|Marginal Cost |

|Workers Hired per |Rubber Boats per | | | |Cost |Cost | |

|Week |Week | | | | | | |

|1 |1 | | | | | | |

|2 |2 | | | | | | |

|3 |5 | | | | | | |

|4 |7 | | | | | | |

|5 |11 | | | | | | |

|6 |14 | | | | | | |

|7 |16 | | | | | | |

|8 |17 | | | | | | |

|9 |18 | | | | | | |

|10 |18 | | | | | | |

4. Determine whether each of the following statement is True or False, and explain your answers.

a. If average cost is greater than marginal cost, then average total cost must be increasing.

b. If average cost is rising, marginal cost must be rising.

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