ECON 10010 Lecture Notes - Lecture 12: Opportunity Cost, Fixed Cost, Takers

14 views7 pages

periwinklechimpanzee451

7 Nov 2017

School

Department

Economics

Course

ECON 10010

Professor

Kirk Doran

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

First they need to know what the price is: prices come from markets. Lecture: revenue is the money that you bring in, marginal cost (mc) has a negative second derivative, sometimes, marginal cost can increase at the beginning, due to learning and specialization of labor, marginal cost graph. # of firms: q as a function of cost. Mc: total cost as function of q of output. Q of output: mc increases at an ever-increasing rate, it never starts at 0 due to fixed costs, marginal cost is always increasing because marginal product is decreasing, this is true because: Diminishing marginal product is the same thing mathematically as increasing mc: mc and atc formula. Mc = tc for a small change in q. Atc = afc + avc: fixed costs don"t vary with q, average fixed costs (afc): decreasing ratio downward sloping curve, average variable costs (avc): increasing ration upward sloping curve.

Related Questions

Salvatore Chapter 1:

Discussion Questions: 9. How is the concept of a normal return on investment related to the distinction between business and economic profit?

Problems:

5. Determine which of the two investment projects a manager should choose if the discount rate of the firm is 10%. The first project promises a profit of $100,000 in each of the next 4 years, while the second project promises a profit of $75,000 in each of the next 6 years.

6. Determine which of the two investment projects of Problem 5 the manager should choose if the discount rate of the firm is 20%.

15. Integration Problem Samantha Roberts has a job as a pharmacist earning $30,000 per year, and she is deciding whether to take another job as the manager of another pharmacy for $40,000 per year or to purchase a pharmacy that generates a revenue of $200,000per year. To purchase the pharmacy, Samantha would have to use her $20,000 savings and borrow another $80,000 at an interest rate of 10% per year. The pharmacy that Samantha is contemplating purchasing has additional expenses of $80,000 for supplies, $40,000 for hired help, $10,000 for rent, and $5,000 for utilities. Assume that income and business taxes are zero and that the repayment of the principle of the loan does not start before 3 years. (a) What would be the business and economic profit if Samantha purchased the pharmacy? Should Samantha purchase the pharmacy? (b) Suppose that Samantha expects that another pharmacy will open nearby at the end of 3 years and that this will drive the economic profit of the pharmacy to zero. What would the revenue of the pharmacy be in 3 years? (c) What theory of profit would account for profits being earned by the pharmacy during the first 3 years of operation? (d) Suppose that Samantha expects to sell the pharmacy at the end of 3 years for $50,000 more than the price she paid for it and that she requires a 15% return on her investment. Should she still purchase the pharmacy?

Spreadsheet Problem (see attached Excel doc)

Using the data below, (Excel doc) where column A represents student numbers, column B the finishing time for a 1 mile race for 10 students, and column C the age of the students, (a) Use the data analysis tools to plot a line graph of all the finishing times. (b) Calculate a mean, median, mode, sample variance, sample standard deviation, and coefficient of variation to statistically describe the data. (c) Use Excel to fine the covariance between the two variables. What does the covariance indicate about the relationship between finishing time and age?

Note:

P15(d): Change ââ¦ for $50,000 more than â¦â to ââ¦ for $50,000 less than â¦â Compare the present value of economic profit in each of the next three years and the loss of $50,000 in the third year using 15% as the discount rate.

The spreadsheet problem (b): Calculate a mean, â¦. to statistically describe the data of both variables, Time and Age.

Individual problems:

3-1 You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value). U2 has a concert the same knight, and this represents your next-best alternative activity. Tickets to the U2 concert cost $80, and on any particular day, you would be willing to pay up to $100 to see this band. Assume that there are no additional costs of seeing either show. Based on the information presented, what is the opportunity cost of seeing Bruce Springsteen?

3-3 Because of the housing bubble, many houses are now selling for much less than their selling price just 2 to 3 years ago. There is evidence that homeowners with virtually identical houses tend to ask for more is they paid more for the house. What fallacy are they making?

Salvatore Chapter 3:

Discussion Questions:

9. How would you react to a sales managerâs announcement that he or she has in place a marketing program to maximize sales?

Problems:

1(a). Given the following total-revenue function: TR= 9Q - Q^2

Derive the total-, average-, and marginal- revenue schedules from Q=0 to Q=6 by 1âs.

7. Given the total-cost schedule: Q 0 1 2 3 4

TC 1 12 14 15 20

Derive the average- and marginal-cost schedules.

9. With the total-revenue curve of Problem 1 and the total-cost curve of problem 7, derive the total-profit function and show how the firm determines the profit-maximizing level of output.

Note:

DQ9: Does maximum sales (revenue) equal maximum profit (see figure 3-4)?

Revised P1(a): Derive the total-revenue, average-revenue, and marginal-revenue schedules from Q = 0 to Q = 4 by 1s.

Average revenue (AR) = total revenue (TR)/Q

Marginal revenue (MR) = change in total revenue/change in Q

For example:

Q	TR	AR	MR
2	14	7 (=14/2)
3	18	6 (=18/3)	4 (=(18-14)/(3-2)

Revised P9: With the total-revenue schedule of Problem 1 and the total-cost schedule of Problem 7, show the profit-maximizing level of output (profit=TR-TC).

Froeb et al. Chapter 4:

Individual problems:

4-5 Your insurance firm processes claims through its newer, larger high-tech facility and its older, smaller low-tech facility. Each month, the high-tech facility handles 10,000 claims, incurs $100,000 in fixed costs and $100,000 in variable costs. Each month, the low-tech facility handles 2,000 claims, incurs $16,000 in fixed costs and $24,000 in variable costs. If you anticipate a decrease in the number of claims, where will you lay off workers?

4-6 A copier company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two new copiers, and output increased by 100,000 pages per day. One month ago, they added five workers, and productivity also increased by 50,000 pages per day. Copiers cost about twice as much as workers. Would you recommend they hire another employee or buy another copier?

Please no cursive or typed out

1. (65 points total).

a) (5 points) Fill in the Table below.

Number of workers	Units of output	MPN
0	0
1	20
2	38
3	53
4	66
5	77
6	86
7	93

b. (10 points) Define the marginal product of labor and explain how it relates to the production function (with N on horizontal axis and Y on vertical axis). What shape does a production function typically take and why? Does this production function take the 'typical' shape?

c)(5 points) Assume that you sell your output to Europe for a US price = $10. The exchange rate is this time is $1.07 per Euro. What is the price of your product in Euros? Please round to 2 decimal places.

d) (5 points) You can hire all the workers you want at $80 per worker. Along with the US price = $10, calculate the number of workers that you will hire and the associated profit in REAL terms (as we did in class, we 'assume away' all other costs of production). Please give me the marginal REAL profit of each worker hired and then add them up and that is the total profit in real terms.

e)(5 points) Inflation data in the US is weaker than the Fed would like and thus, expectations change such that the Fed is less likely to raise interest rates. As a result, the new and updated exchange rate is $1.23 per Euro. What has happened to the value of the US dollar and what is the new Euro price of your product, assuming that your American price stays at $10?

f).(5 points) Given the change in conditions you decide to raise the price of your product in US dollar terms so that the Euro price stays the same as it was before the change in the exchange rate (part c above). What is the new US dollar price? Please show all work.

g) (10 points) What has happened to the marginal revenue product (MRPN) for each worker (has it gone up or down?) and why given the change in price? Be sure to define what the marginal revenue product is and what it means in 'laypersons' terms.

h) (10 points) Given that the US$ price of your product has changed, explain how and why you would change your behavior. Please provide the intuition beginning your answer with... at the same level of labor input I am no longer ......... (please be as specific as possible). Again, explain in REAL terms, not nominal terms.

i. (5 points) Calculate the new level of profits in REAL terms given the change in condition including the change in the exchange rate, the change in the US $ price of your product. and the change in your behavior.

j)(5 points) The Fed has had its eye on inflation for a long time and have been disappointed in that inflation has been too low. Is the change in the value the dollar vs the Euro a welcome development for the Fed? Why or why not? Assume that these conditions changed in a similar way for many US firms.

Question 3

We saw in class that the same good can fall in different categories (public/private/club/common resource) depending on circumstances. An example of such a good would be watching a movie at the theater. If a lot of people want to watch it, the movie is a _________. If very few people want to watch it (to the point where a room could not even be filled), the movie is likely to be a _______.

A. a common resource; a public good

B. a public good; a common resource

C. a private good; a club good

D. a club good; a private good

3 points

Question 4

Which of the following statements about the free-rider problem is not true?

A. Individuals have an incentive to free-ride when the good is not excludable.

B. The kinds of goods for which the free rider problem arises are common resources and public good.

C. Markets for goods for which there is a free-rider problem are inefficient because not enough of the good is produced.

D. Goods for which the free-rider problem exists tend to be over provided relative to what would be optimal.

4 points

Question 5

To achieve the efficient provision of public goods, the

A. market should be allowed to operate without government intervention.

B. government must limit the provision of those goods.

C. government must tax producers of those goods.

D. government must either provide those goods or subsidize their production.

3 points

Question 6

Which of the following statements about public goods is not true?

A. Because people cannot be excluded from their consumption and thus have no incentive to pay for them, public goods are underprovided by the market.

B. Efficiency requires that the government provide or fund (subsidize) the provision of all public goods.

C. Efficiency requires that the government provide or fund only the public goods that create more benefits than costs to society.

D. In reality, it is hard to provide public goods efficiently.

3 points

Question 7

Public goods must be provided by the government as the market on its own will fail to provide them. However, even with government provision it is very hard to achieve efficiency. Why?

A. In reality, it is very hard (if not impossible) to accurately estimate the benefits of providing a public good.

B. A. In reality, there can be overruns in the cost of providing the public good.

C. Government decisions about which public goods to provide can be influenced by lobbying by interest groups.

D. All of the above are true.

4 points

Question 8

Which of the following is not a common resource?

A. congested roads

B. clean water

C. wild life, which hunters want to hunt and others want to view.

D. a fireworks display.

3 points

Question 9

Many species of animals must be protected by law to keep them from extinction. Why are cows not one of these endangered species even though there is such a high demand for beef?

A. Cows reproduce at a high rate and have adapted well to their environment.

B. Public policies protect cows from predators and diseases.

C. Cows are privately owned (private goods), whereas many endangered species are owned by no one (common resources).

D.There is a natural ecological balance between the birth rate of cows and human consumption.

3 points

Question 10

Which of the following statements about common resources is not true?

A. Due to the free-rider problem, common resources tend to be overused.

B. Because there is rivalry in the consumption of common resources, whenever one person uses a common resource it is imposing a negative externality on others who might also want to use it.

C. There are no private solutions to the management of common resources.

D. One of the solutions that ensures that common resources are properly managed is their privatization.

3 points

Question 11

In our analysis of the firmâs behavior and goals, when we talk about cost, we include _________, and when we talk about profit, we mean ________.

A. Explicit costs only; economic profit

B. Implicit costs only; economic profit

C. Implicit costs only; accounting profit

D. Explicit + implicit costs; economic profit

E. Explicit + implicit costs; accounting profit

3 points

Question 12

One of the differences between explicit and implicit costs is that

A. explicit costs must be greater than implicit costs.

B. explicit costs do not require a direct monetary outlay, whereas implicit costs do.

C. implicit costs do not require a direct monetary outlay, whereas explicit costs do.

D. implicit costs must be greater than explicit costs.

3 points

Question 13

Which of the following is FALSE:

A. If accounting profit is zero, then economic profit is negative

B. Economic profit takes cost the opportunity cost of time and capital into account

C. Economic Profit = Accounting Profit + Implicit Cost

D. Economic Profit = Accounting Profit â Implicit Cost

3 points

Question 14

Which of the following is an example of an implicit cost?

(i) the owner of a firm forgoing an opportunity to earn a large salary working in Wall Street

(ii) interest paid on the firm's debt

(iii) rent paid by the firm to lease office space

A. (ii) and (iii) only

B. (i) and (iii) only

C. (i) only

D. (iii) only

3 points

sapphirekangaroo316

ECON 10010 Lecture Notes - Lecture 12: Opportunity Cost, Fixed Cost, Takers

Document Summary

Get access

Related Documents

ECON 10010 Chapter Notes - Chapter 12: Fixed Cost, Allocative Efficiency, Sunk Costs

ECON 10010 Lecture Notes - Lecture 13: Demand Curve, Arkansas Highway 5, Deadweight Loss

ECON 10010 Lecture Notes - Lecture 16: Oligopoly, Natural Monopoly, Monopolistic Competition

Related Questions