Exercise session 3



Problem 1
Suppose that a fisherman exhibits the relationship between hours spent fishing and  the quantity of
fish caught as above.
a)What is the marginal product of each hour spent fishing?
b)Use this data to graph the fisherman’s production function. Explain its shape.
c)The fisherman has a fixed cost of 10$ (his pole). The opportunity cost of his time is
$5 per hour. Graph the fisherman’s total-cost curve. Explain its shape.
Hours
Quantity of fish
Marginal Product
Total cost
0
0
1
10
2
18
3
24
4
28
5
30

Problem 2
You can choose multiple answers: when the marginal product of labor increases as the amount of
labor  employed increases,
a)the additional worker has made other workers more productive
b)the firm also must have increased the amount of capital
c)the firm is experiencing economies of scale
d)there has been an improvement in the available technology

Problem 3
The table above gives the short-run and long-run total costs for various  levels of output of a
certain firm.
a)Which column, TC1 or TC2, gives long-run total cost, and which gives  short-run total cost? How
do you know?
b)For each level of output, find short-run TFC, TVC, AFC, AVC, and MC .
Q
TC1
TC2
TFC
TVC
AFC
AVC
MC
0
0
350
1
300
400
2
400
435
3
465
465
4
495
505
5
540
560
6
600
635
7
700
735

Problem 3
c) At what output level would the firm’s short-run and long-run input  mixes be the same?
d) Starting from producing two units, the firm’ managers decide to double  production to four
units. So they simply double all of their inputs
in the long run. Comment on their managerial skills.
e) Over what range of output do you see economies of scale?  Diseconomies of scale? Constant
returns to scale?
Q
TC1
TC2
ATC
0
0
350
1
300
400
2
400
435
3
465
465
4
495
505
5
540
560
6
600
635
7
700
735

Problem 4
Suppose the table above represents the long run total costs of three  different firms. Does each of
these firms experience economies of scale or  diseconomies of scale?
Firm A
Firm B
Firm C

Problem 5
Labor
Output
Marginal
Product
Variable Cost
Fixed Cost
0
0
--
$0
$10
1
200
200
$20
$10
2
350
$40
$10
3
450
$60
$10
4
50
$80
$10
5
25
$100
$10
6
530
$120
$10
Complete the table

For a given level of output, the short-run total cost of production
a. always falls below the long-run total cost of production
b. always exceeds the long-run total cost of production
c. always equals the long-run total cost of production
d. may exceed or equal the long-run total cost of production
e. may exceed or fall below the long-run total cost of production
Problem 6

Problem 7
If Papagna's Pizza Parlor knows that the marginal cost of the 500th pizza is $3.00 and that the
average total cost of making 499 pizzas is $3.30, then
a. average costs are rising at Q = 500
b. average costs are falling at Q = 500
c. total costs are falling at Q = 500
d. average variable costs must be falling
e. average variable costs must be rising

Problem 8
Klara has been working for an engineering firm and earning an annual salary of $80,000. She decides
to open her own engineering business. Her annual expenses will include $15,000 for office rent,
$3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a
secretary/bookkeeper. Klara will cover her start-up expenses by cashing in a $20,000 certificate of
deposit on which she was earning annual interest of $500.
•What is Klara’s annual implicit cost?
•What is Klara’s annual accounting cost?
•What is Klara’s annual economic cost?
•According to Klara’s accountant, what is the revenue that will yield her business $50,000 in
profits?
•According to an economist, what is the revenue that will yield Klara’s business $50,000 in
economic profits?