ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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KEY TERMS average fixed cost (AFC), 493 average total cost (ATC), 489 average variable cost (AVC), 493 constant returns to scale, 496 diseconomies of scale, 494 economies of scale, 494 0 10 20 30 EXERCISES 1. Use the following information to determine the total fixed costs, total variable costs, average fixed costs, average vari- able costs, average total costs, and marginal costs. Total Output Costs TFC 40 50 60 0 1 2 500 3 4 5 . Constant returns to scale occur when increases in out- put lead to no changes in unit costs and the quantities of all resources are variable. $22-3a • Specialization can lead to economies of scale-larger size enables people to specialize in the jobs where they use their comparative advantage. $22-3b Chapter 22 Supply: The Costs of Doing Business $100 $150 $225 $230 $300 $400 2. Use the following table to answer the questions that follow. Total Output Cost TFC TVC AFC AVC ATC MC $ 20 $ 40 $ 60 $ 90 $120 $180 $280 law of diminishing marginal returns, 488 long-run average-total-cost curve (LRATC), 495 marginal cost (MC), 490 minimum efficient scale (MES), 498 TVC AFC AVC ATC MC The minimum efficient scale (MES) occurs at the min- imum point of the long-run average-total-cost curve, $22-3c a. Calculate the total fixed costs, total variable costs, av- erage fixed costs, average variable costs, average total costs, and marginal costs. The long run is the planning horizon, where all resour- ces are variable. Once a size or scale is selected, the firm is operating in the short run. $22-3d scale, 494 short-run average total cost (SRATC), 493 total costs (TC), 492 total fixed costs (TFC), 492 total variable costs (TVC), 492 b. Plot each of the cost curves. c. At what quantity of output does marginal cost equal average total cost and average variable cost? 3. Using the table in exercise 1, explain what happens to ATC when MC> ATC, MC< ATC, and MC = ATC. 4. Using the table in exercise 2, find the quantity where MC ATC. Find the quantity where ATC is at its minimum. Find the quantity that is the most efficient operating point for the firm. 5. Describe some conditions that might cause large firms to experience inefficiencies that small firms would not experience. 6. What is the minimum efficient scale? Why would different industries have different minimum efficient scales? 7. Describe the relation between marginal and average costs. Describe the relation between marginal and average fixed costs and between marginal and average variable costs. 8. Explain why the ATC and MC curves are U-shaped. 9. Explain why the short-run marginal-cost curve must intersect the short-run average-total-cost curve at the minimum point of the ATC. Does the marginal-cost curve intersect the average-variable-cost curve at its minimum point? What about the average-fixed-cost curve? Explain why the marginal-cost curve does not also intersect the average-fixed-cost curve at its mini- mum point. Chapter 22 Supply: The Costs of Doing Business 10. Why does the minimum point of the average-total-cost curve show the quantity at which the firm is most effi- ciently supplying output in the short run? 11. Consider a firm with a fixed-size production facility as described by its existing cost curves. a. Explain what would happen to those cost curves if a mandatory health insurance program were imposed on all firms. b. What would happen to the cost curves if the plan required the firm to provide a health insurance pro- gram for each employee worth 10 percent of the employee's salary? c. How would that plan compare to one that requires each firm to provide a $100,000 group program that would cover all employees in the firm, no matter what the number of employees was? 12. Does the following statement make sense: "You made a real blunder. The $600 you paid for repairs is worth more than the car." 13. Explain the statement, "We had to increase our volume to spread the overhead." 14. Three college students are considering operating a tutoring business in economics. This business would require that they give up their current jobs at the stu- dent recreation center, which pay $6,000 per year. A fully equipped facility can be leased at a cost of $8,000 per year. Additional costs are $1,000 a year 501 for insurance and $.50 per person per hour for materi- als and supplies. Their services would be priced at $10 per hour per person. a. What are fixed costs? b. What are variable costs? c. What is the marginal cost? d. How many student-hours would it take to break even? 15. Express Mail offers overnight delivery to customers. It is attempting to come to some conclusion on whether to expand its facilities. Currently its fixed costs are $2 million per month, and its variable costs are $2 per package. It charges $12 per package and has a monthly volume of 2 million packages. If it expands, its fixed costs will rise by $1 million and its variable costs will fall to $1.50 per package. Should it expand? 16. Suppose the cost of starting Business A is very, very high. But once begun, the marginal cost of additional output is near zero. Draw this situation using the marginal-cost curve. 17. It requires a large sum of money to produce a musical CD. The band has to be formed, practiced, and so forth. The recording studio has to be rented and the music performed and taped. Once one CD has been created, it costs virtually nothing to produce additiona CDs. Draw the average and marginal costs for this business.
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Transcribed Image Text:KEY TERMS average fixed cost (AFC), 493 average total cost (ATC), 489 average variable cost (AVC), 493 constant returns to scale, 496 diseconomies of scale, 494 economies of scale, 494 0 10 20 30 EXERCISES 1. Use the following information to determine the total fixed costs, total variable costs, average fixed costs, average vari- able costs, average total costs, and marginal costs. Total Output Costs TFC 40 50 60 0 1 2 500 3 4 5 . Constant returns to scale occur when increases in out- put lead to no changes in unit costs and the quantities of all resources are variable. $22-3a • Specialization can lead to economies of scale-larger size enables people to specialize in the jobs where they use their comparative advantage. $22-3b Chapter 22 Supply: The Costs of Doing Business $100 $150 $225 $230 $300 $400 2. Use the following table to answer the questions that follow. Total Output Cost TFC TVC AFC AVC ATC MC $ 20 $ 40 $ 60 $ 90 $120 $180 $280 law of diminishing marginal returns, 488 long-run average-total-cost curve (LRATC), 495 marginal cost (MC), 490 minimum efficient scale (MES), 498 TVC AFC AVC ATC MC The minimum efficient scale (MES) occurs at the min- imum point of the long-run average-total-cost curve, $22-3c a. Calculate the total fixed costs, total variable costs, av- erage fixed costs, average variable costs, average total costs, and marginal costs. The long run is the planning horizon, where all resour- ces are variable. Once a size or scale is selected, the firm is operating in the short run. $22-3d scale, 494 short-run average total cost (SRATC), 493 total costs (TC), 492 total fixed costs (TFC), 492 total variable costs (TVC), 492 b. Plot each of the cost curves. c. At what quantity of output does marginal cost equal average total cost and average variable cost? 3. Using the table in exercise 1, explain what happens to ATC when MC> ATC, MC< ATC, and MC = ATC. 4. Using the table in exercise 2, find the quantity where MC ATC. Find the quantity where ATC is at its minimum. Find the quantity that is the most efficient operating point for the firm. 5. Describe some conditions that might cause large firms to experience inefficiencies that small firms would not experience. 6. What is the minimum efficient scale? Why would different industries have different minimum efficient scales? 7. Describe the relation between marginal and average costs. Describe the relation between marginal and average fixed costs and between marginal and average variable costs. 8. Explain why the ATC and MC curves are U-shaped. 9. Explain why the short-run marginal-cost curve must intersect the short-run average-total-cost curve at the minimum point of the ATC. Does the marginal-cost curve intersect the average-variable-cost curve at its minimum point? What about the average-fixed-cost curve? Explain why the marginal-cost curve does not also intersect the average-fixed-cost curve at its mini- mum point. Chapter 22 Supply: The Costs of Doing Business 10. Why does the minimum point of the average-total-cost curve show the quantity at which the firm is most effi- ciently supplying output in the short run? 11. Consider a firm with a fixed-size production facility as described by its existing cost curves. a. Explain what would happen to those cost curves if a mandatory health insurance program were imposed on all firms. b. What would happen to the cost curves if the plan required the firm to provide a health insurance pro- gram for each employee worth 10 percent of the employee's salary? c. How would that plan compare to one that requires each firm to provide a $100,000 group program that would cover all employees in the firm, no matter what the number of employees was? 12. Does the following statement make sense: "You made a real blunder. The $600 you paid for repairs is worth more than the car." 13. Explain the statement, "We had to increase our volume to spread the overhead." 14. Three college students are considering operating a tutoring business in economics. This business would require that they give up their current jobs at the stu- dent recreation center, which pay $6,000 per year. A fully equipped facility can be leased at a cost of $8,000 per year. Additional costs are $1,000 a year 501 for insurance and $.50 per person per hour for materi- als and supplies. Their services would be priced at $10 per hour per person. a. What are fixed costs? b. What are variable costs? c. What is the marginal cost? d. How many student-hours would it take to break even? 15. Express Mail offers overnight delivery to customers. It is attempting to come to some conclusion on whether to expand its facilities. Currently its fixed costs are $2 million per month, and its variable costs are $2 per package. It charges $12 per package and has a monthly volume of 2 million packages. If it expands, its fixed costs will rise by $1 million and its variable costs will fall to $1.50 per package. Should it expand? 16. Suppose the cost of starting Business A is very, very high. But once begun, the marginal cost of additional output is near zero. Draw this situation using the marginal-cost curve. 17. It requires a large sum of money to produce a musical CD. The band has to be formed, practiced, and so forth. The recording studio has to be rented and the music performed and taped. Once one CD has been created, it costs virtually nothing to produce additiona CDs. Draw the average and marginal costs for this business.
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