Problem Set #3

Instructions1. Put away you pen and pencils2. Put your name where it says “Graded

by:”3. We will grade questions 1 and 44. After grading each question, write in

their score in the blank. ex: ( ____/5)5. Follow the directions explicitly!

Questions #1:Real World Examples

20 Points Total

5 Point Total 1 Point- definition of explicit costs

(traditional out of pocket costs)1 Point- Example showing explicit costs

(costs to a firm or a consumer)1 Point- definition of implicit costs

(opportunity costs that a firm or person must “pay” to themselves)

1 Point- Example showing implicit costs (forgone wage, forgone time and effort)

1 Point- Clarity of examples (numeric examples preferred)

A. Explicit and Implicit Costs

5 Point Total 2 Points- Definition (As additional inputs

(workers) are added to fixed resources, the additional output generated by each new input will eventually fall.

2 Points- Example showing that MARGINAL PRODUCT (additional output from each new worker) will eventually fall

1 Point (Clarity)- Numbers in example (numbers show how marginal product eventually falls)

B. Law of Diminishing Marginal Returns

5 Point Total 1 Point- definition of fixed costs (costs that

DO NOT change with the amount produced)

1 Point- Example of a fixed costs/resource1 Point- definition of variable costs (costs

that change with the amount produced)1 Point- Example of a variable cost/resource1 Point- Example showing that Total cost

equals fixed plus variable. (Numeric example)

C. Fixed, Variable, and Total Costs

D. Economies of Scale and Diseconomies of Scale

5 Point Total – 1 Point- definition of Economies of Scale

(area of LRATC where ATC is decreasing)

– 1 Point- Example of Economies of Scale– 1 Point- definition of Diseconomies of

Scale (area of LRATC where ATC is increasing)

– 1 Point- Example of Diseconomies of Scale

– 1 Point- Clarity of examples

2.a. Tony’s Hat Store

• 2 point for completing the chart

• 2 point for completing the graph

• 2 point for completing all definitions

• 4 points for answering all questions

• Each point(s) are ALL or NOTHING

2.b. “Cost and Competitive Market Supply”

2.b. Cost and Competitive Market Supply

Part A: ½ point each

1. -correctly completing the chart

-correctly completing the graph

-answer all questions

2.B. 7, $11, $7, $11, $4, $28

C. 4.5, $11, $6/5.50, $11, $5/5.50, $22.50/24.75

D. 4, $6, loss, $1, loss, $4

Part B: ½ point each

A.Correctly complete the chart

B.Between 3 and 4, $6

C.Correctly complete the chart

D.MC, MC, AVC

4A. Correctly complete the chart

B. Answer the question

C. $8, 6,000 units, positive economic profit

D. increase, decrease, increase, decrease

E. $6, 4, 2,000 firms, 0, 8,000 units, minimum

F & G- Answer the questions

2.c. MP and MC

• 2 points for Explaining that the Marginal Product curve is a mirrored image of the Marginal Cost Curve. As MP increases MC Decreases and as MP decreases, MC increases.

• 1 point for stating that the shape of the curves are because of the Law of Diminishing Marginal Returns.

• 2 points for showing the MC curve using numerical examples

Workers Total Prod Marg Prod Total Cost Marginal Cost

0 0 - $20 -

1 5 5 $30 10/5 = $2

2 13 8 $40 10/8 = $1.25

3 19 6 $50 10/6 = $1.6

4 23 4 $60 10/4 = $2.5

5 25 2 $70 10/2 = $5

6 26 1 $80 10/1 = $10

•The additional cost of the first 13 units produced falls because workers have increasing marginal returns.•As production continues, each worker adds less and less to production so the marginal cost for each unit increases.

Why is the MC curve U-shaped?

13

3. Cory’s Surfboard Inc.20 Points Total

3.The Chart

1 Point 1 Point 1 Point 1 Point 1 Point

5 Point Total

5 Point Total 1 point- Correctly labeled axis with numbers 1 point- Correctly plotted MC1 point- Correctly plotted ATC1 point- Correctly plotted AVC1 point- Correctly plotted AFV

3. A: Plotted Graph

Quantity

Co

st/P

rice

AFC

AVC

ATCMC

Question #3B5 point total

• 1 point for stating an increase in the price of an input (styrofoam) will increase resource costs (MC increases or supply decreases)

• 2 points for stating that an increase in variable costs will increase the MC, ATC and AVC curves.

• 1 point for stating that an increase in a fixed input (rent) will NOT change the MC curve

• 1 point for stating that an increase in fixed costs will increase the ATC and AFC only.

5 Point Total 1 point- Output = 7 surfboards1 point-Correctly placing the MR curve at $1502 point- $65.71 Profit per Unit1 point- Explanation- Cory is selling each unit for

$150 and his cost for each surfboard is $84.29.

OR

Total Profit equals TR ($1050)- TC ($590)= $460$460 divided by 7 equals $65.71

Question 3.C.

4a. In-Class FRQ12 Points Total

4a. 2005 FRQ

MCATC

P

Qq

Firm

PD=MR

4a. 2005 FRQ

MCATC

P

Qq

Firm

P PD=MR

4a. 2005 FRQ

4a. 2005 FRQ

4a. 2005 FRQ

Check that it is UP to ATC

4a. 2005 FRQ

Check that it is UP to ATC

4a. 2005 FRQ

Check that it is UP to ATC

4a. 2005 FRQ

Check that it is UP to ATC

4a. 2005 FRQ

4a. 2005 FRQ

4a. 2005 FRQ

4a. 2005 FRQ