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Tutorial For Students Economics Basic

The document discusses economic costs and graphs. It provides examples of how to graph total fixed cost, total variable cost, total cost, average fixed cost, average variable cost, average total cost, and marginal cost. It explains how the shapes of these curves are influenced by increasing and diminishing returns. The document also discusses perfect competition and provides true/false questions about profit maximization for firms in perfect competition.

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asadullahq
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15 views

Tutorial For Students Economics Basic

The document discusses economic costs and graphs. It provides examples of how to graph total fixed cost, total variable cost, total cost, average fixed cost, average variable cost, average total cost, and marginal cost. It explains how the shapes of these curves are influenced by increasing and diminishing returns. The document also discusses perfect competition and provides true/false questions about profit maximization for firms in perfect competition.

Uploaded by

asadullahq
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Tutorial 9

Economic costs and their graphs:

1. A firm has $60 of fixed costs, and variable costs as indicated in the table below. Copy and
complete the table:

a. Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing
returns influences the shapes of the total variable-cost and total-cost curves.

b. Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and
their relationships to one another. Specifically, explain in nontechnical terms why the MC curve
intersects both the AVC and ATC curves at their minimum points.

c. Explain how the locations of each of the four curves graphed in question b would be altered if (1)
total fixed cost had been $100 rather than $60, and (2) total variable cost had been $10 less at each
level of output.

2. Indicate how each of the following would shift the (a) marginal cost curve, (b) average variable
cost curve, (c) average fixed cost curve, and (d) average total cost curve of a manufacturing firm. In
each case specify the direction of the shift.

a. A reduction in business property taxes

b. An increase in the nominal wages of production workers

c. A decrease in the price of electricity

d. An increase in the insurance rates on plant and equipment

e. An increase in transportation costs


Perfect competition

3. Evaluate each of the following statements for true and false:

a. A profit-maximizing firm in a perfectly competitive industry should select the output level at which
the difference between the market price and marginal cost is greatest.

b. An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short
run

4. Which of the following statements is NOT a characteristic of a perfectly competitive

market?

A. The equilibrium output is both allocatively and productively efficient.

B. While firms in a perfectly competitive market can make positive, zero, or negative economic
profits in the short-run, they have to make zero economic profits in the long-run.

C. Marginal revenue for a perfectly competitive firm is equal to the market price because firms in a
perfectly competitive market are price takers.

D. In the short-run, a perfectly competitive firm will continue production as long as it can cover its
total variable costs.

E. There are many firms in a perfectly competitive market that produce differentiated products

5.

The figure above shows the cost structure of a representative firm in a perfectly competitive market.

Suppose the current market equilibrium price is $12. Which of the following statements is FALSE?

A. The marginal revenue curve for the firm is P = $12.

B. There is a negative economic profit in the short run.


C. The long-run equilibrium price is $16.

D. In the short run, this firm will shut down the business and leave the market.

E. In the long run, if there are 100 firms staying in this market, the equilibrium quantity will be 1,000
units.
Answers
1.

(a) See the graph. Over the 0 to 4 range of output, the TVC and TC curves slope upward at a
decreasing rate because of increasing marginal returns. The slopes of the curves then increase at an
increasing rate as diminishing marginal returns occur.

(b) See the graph. AFC (= TFC/Q) falls continuously since a fixed amount of capital cost is spread over
more units of output. The MC (= change in TC/change in Q), AVC (= TVC/Q), and ATC (= TC/Q) curves
are Ushaped, reflecting the influence of first increasing and then diminishing returns. The ATC curve
sums AFC and AVC vertically. The ATC curve falls when the MC curve is below it; the ATC curve rises
when the MC curve is above it. This means the MC curve must intersect the ATC curve at its lowest
point. The same logic holds for the minimum point of the AVC curve.
(c1) If TFC has been $100 instead of $60, the AFC and ATC curves would be higher—by an amount
equal to $40 divided by the specific output. Example: at 4 units, AFC = $25.00 [= ($60 + $40)/4]; and
ATC = $62.50 [= ($210 + $40)/4]. The AVC and MC curves are not affected by changes in fixed costs.

(c2) If TVC has been $10 less at each output, MC would be $10 lower for the first unit of output but
remain the same for the remaining output.

The AVC and ATC curves would also be lower—by an amount equal to $10 divided by the specific
output. Example: at 4 units of output, AVC = $35.00 [= $150 - $10)/4], ATC = $50 [= ($210 - $10)/4].
The AFC curve would not be affected by the change in variable costs.

2.

3. a. False. For a profit-maximizing firm in a perfectly competitive industry, profit is maximized by


producing a quantity at which marginal cost is equal to the market price.

b. False. Changes in fixed cost do not affect marginal cost and so do not change the profit-
maximizing quantity of output produced. Changes in fixed cost do, however, change the amount of
profit earned and the firm’s break-even price: the higher the fixed cost, the higher the firm’s break-
even price and the lower its profit.

4. E

5. D

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