CHAPTER 7 Production, Costs, Marginal Revenue Product
Test Yourself
1.
TFC
AFC
(thousands
(thousands
Output of dollars)
of dollars)
0 360 —
1 360 360
2 360 180
3 360 120
4 360 90
5 360 72
6 360 60
Figure 1
2.
TVC
AVC MVC
(thousands
(thousands (thousands
Output of dollars)
of dollars) of dollars)
1 40 40 40
2 80 40 40
3 120 40 40
4 176 44 56
5 240 48 64
6 360 60 120
Figure 2
MVC is the change in TVC divided by the change in output. MC is the change in TC divided by the change in output. The firm here had no fixed costs so MC = MVC.
3.
TC
AC
(thousands
(thousands
Output of dollars)
of dollars)
0 360 —
1 400 400
2 440 220
3 480 160
4 536 134
5 600 120
6 720 120
Figure 3
5. It can raise its profits by increasing its use of oil. Adding 1 gallon of oil will raise its revenues by $2.20, and its cost by only $2.07, leaving it with an increase in profits of $0.13.
8. When Naomi bought a great deal of corn, the MPP of corn was low because of diminishing returns. The ratio of corn to piglets was high: More corn could not produce much more output. Now, she buys more piglets. This reduces the ratio of corn to piglets, and raises the MPP of corn because there is less corn per chick and diminishing returns have not proceeded as far. The conclusion is that the MPP of a factor is inversely related to the proportion of that factor to other factors.
9. For labor, the MPP is 16, the price is $12, and the ratio of the two is a bit more than 1.3; for land, the MPP is 1,400, the price is $1,200, and the ratio of the two is less than 1.2. Since the two ratios are not equal, the farmer is not minimizing costs. She should increase labor and reduce land, thereby reducing the MPP of the former and increasing the MPP of the latter.
Discussion Questions
1. The long-run average cost will be lower than the short-run average cost, even though the former includes the cost of new machines. In the long run, the firm will have lower labor costs, and it will avoid the costs of machines breaking down because they are being worked too intensively. These savings will outweigh the added costs of new machines. If the long-run average cost were not less than the short-run average cost, the firm would not buy the new machines.