Economics homework

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ECON 201-003 Assignment #7, Behind the Supply: Inputs and Costs

Due Date: March 19, 2013 @13.00.

1

Question 1 Cost structure of snowboard production (45 points)

Table 1 on pg 3 shows the production costs of snowboards for a firm that operates

in perfect competition.

1. Complete the table by calculating MP, FC, TC, AFC, AVC, ATC, and MC.

Show all the formulas used in your calculations (16 points)

2. Plot MC, ATC, AVC and AFC curves to scale on the same graph (15 points).

3. Explain the shape of the MC curve and show the output level at which the

law of diminishing returns sets in (7 points)

4. Explain the shape of ATC and show the output range at which the

spreading effect dominates the diminishing returns effect and vice versa (7

points)

Note: Fill out Table 1,pg.3, your student information and submit it with the rest of

the assignment

Question 2: Short versus Long Run Cost (55 points)

Don owns a small concrete-mixing company. His fixed cost is the cost of concrete

batching machinery, and his mixer trucks. His variable cost is the cost of the sand,

gravel, and other inputs for producing concrete; the gas and maintenance for the

machinery and trucks; and his workers. He is trying to decide how many mixer

trucks to purchase. He has estimated the cost shown in the following table 2

overleaf, based on the estimates of the number of orders his company will receive

per week:

ECON 201-003 Assignment #7, Behind the Supply: Inputs and Costs

Due Date: March 19, 2013 @13.00.

2

Table 2

Quantity

of trucks

FC VC TC

20

orders

40

orders

60

orders

20

orders

40

orders

60

orders

2 6,000 2,000 5,000 12,000

3 7,000 1,800 3,800 10,800

4 8,000 1,200 3,600 8,400

1. For each level of fixed cost, calculate Don’s total cost of producing 20, 40

and 60 orders per week (10 points)

2. If Don is producing 20 orders per week, how many trucks should he

purchase and what will his average total cost be? Answer the same question

for 40 and 60 orders per week (15 points).

3. Now consider that Don purchased the number of trucks in line with

expecting to produce 40 orders per week. What is the number of trucks?

Suppose that in short term business declines to 20 orders per week. What is

Don’s average total cost per order in the short run? What will Don’s average

total cost per order in the short run be if his business booms to 60 orders

per week (15 points)?

4. Explain why his short run ATC of producing 20 orders per week when the

number of trucks is fixed at 3 is greater than his long-run ATC of producing

20 orders that you calculated in 2 (7 points)?

5. Sketch Don’s LRATC curve and Don’s Short Run ATC curve if he owns 3

trucks (8 points).

ECON 201-003 Assignment #7, Behind the Supply: Inputs and Costs

Due Date: March 19, 2013 @13.00.

3

Student Name:__________________________ Student ID: __________________________ Table 2: Production of snowboards

1 2 3 4 5 6 7 8 9 10

Workers Output Marginal Product

Fixed Cost

Variable Cost Total Cost AFC AVC ATC MC

0 0 3,000 1 15 1,000 2 40 2,000 3 70 3,000

4 110 4,000 5 145 5,000 6 175 6,000 7 200 7,000 8 220 8,000 9 235 9,000 10 240 10,000 11 235 11,000