answer to chapter 11 p and a.docx

8/20/2019 answer to chapter 11 p and a.docx

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A n s w e r s t o t h e P r o b l e m s a n d A p p l i c a t i o n s

1. Which of the following news items involves a short-run decision and whichinvolves a long-run decision? Explain

January, 31, 2008: Starbucks will open ! more stores abroad than originall" predicted# for a total of $!.

%his decision is a long-run decision. &t increases the 'uantit" of all ofStarbucks( factors of production# labor and the si)e of Starbucks( plant.

February, 25, 2008: *or three hours on %uesda"# Starbucks will shut down ever"single one of its #1++ stores so that baristas can receive a refresher course.

%his decision is a short-run decision. &t involves increasing the 'ualit" ofStarbucks( labor and so onl" one factor of production,labor,changes and allthe other factors remain fixed.

June, 2, 2008: Starbucks replaces baristas with vending machines.%his decision is a short-run decision. &t involves changing two of Starbucks(factors of production# labor and one t"pe of capital. ut other factors of production# such as Starbucks( land and other capital inputs such as the storeitself# remain fixed.

July, 18, 2008: Starbucks is closing 1 stores b" the end of /arch.%his decision is a long-run decision. &t decreases the 'uantit" of all ofStarbucks( factors of production# labor andthe si)e of Starbucks( plant.

0. %he table sets out Sue(s Surfboards( total productschedule.

a. raw the total product curve.%o draw the total product curve measurelabor on the x-axis and output on the y-axis.

%he total product curve is upward slopingand is illustrated in *igure 11.1.

b. 2alculate the average product of labor and drawthe average product curve.

%he average product of labor is e'ual to total product divided b" the 'uantit" oflabor emplo"ed. *or example# when 3 workers are emplo"ed# the" produce 10+surfboards a week# so average product is 4+ surfboards per worker. 5s *igure11.0 6on the next page7 shows# the average product curve is upward slopingwhen up to 3 workers are hired and then is downward sloping when more than 4workers are hired.

8abor 6workers

per week7

9utput6surfboards per week7

1 3+0 +3 10+

4 1+! 1$+ 01+ 00+


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c. 2alculate the marginal product of labor and draw the marginal product curve.

%he marginal product of labor is e'ual tothe increase in total product that resultsfrom a one-unit increase in the 'uantit"

of labor emplo"ed. *or example# when 3workers are emplo"ed# total product is10+ surfboards a week. When a fourthworker is emplo"ed# total productincreases to 1+ surfboards a week. %hemarginal product of increasing thenumber of workers from 3 to 4 is 4+surfboards. We plot the marginal productat the halfwa" point# so at a 'uantit" of 3.! workers# the marginal product is 4+surfboards per worker per week. 5s

*igure 11.0 6on the next page7 shows#the marginal product curve is upwardsloping when up to 0.! workers a week are emplo"ed and it is downward sloping when more than 0.! workers a weekare emplo"ed.

d. 9ver what output range does the firm eno" the benefits of increasedspeciali)ation and division of labor?

%he firm eno"s the benefits of increased speciali)ation and division of laborover the range of output for which the marginal cost decreases. %his range ofoutput is the same range over which the marginal product of labor rises. *orSue(s Surfboards# the benefits of increased speciali)ation and division of labor

occur until 0.! workers are emplo"ed.e. 9ver what output range does the firm experience diminishing marginal product of

labor?%he marginal product of labor decreases after 0.! workers are emplo"ed.

f. 9ver what output range does this firm experience an increasing average productof labor but a diminishing marginal product of labor?

%he marginal product of labor decreases and the average product of laborincreases between 0.! and 3.! workers.

g. Explain how it is possible for a firm to experience simultaneousl" an increasingaverage product but a diminishing marginal product.

5s long as the marginal product of labor exceeds the average product of labor#

the average product of labor rises. *or a range of output the marginal product oflabor# while decreasing# remains greater than the average product of labor# sothe average product of labor rises. Each additional worker# while producing lessthan the previous worker hired is still producing more than the average worker.


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3. Sue(s Surfboards# in problem 0# hiresworkers at ;!++ a week and its total fixedcost is ;1#+++ a week.

a. 2alculate total cost# total variable cost# andtotal fixed cost of each output in the table.


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cost is the increase in total cost divided b" the increase in output. *or example#when output increases from 10+ to 1+surfboards a week# total cost increasesfrom ;0#!++ to ;3#+++# an increase of

;!++. %his ;!++ increase in total costmeans that the increase in output of 4+surfboards increases total cost b" ;!++./arginal cost is e'ual to ;!++ divided b"4+ surfboards# which is ;10.!+ asurfboard. %he table shows these dataschedules and the curves are plotted in*igure 11.4.

c. &llustrate the connection betweenSue(s AP # MP # AVC # and MC curves ingraphs like those in *ig. 11..

8abor 6workers

7

9utput6surfboards

7

AP 6surfboard

s per worker7

MP 6surfboard

s per worker7

AVC 6dollars

per surfboard

7

MC 6dollars

per surfboard

7

1 3+ 3+.+ 1.4+.+ 10.!+

0 + 3!.+ 14.0$!+.+ 1+.++

3 10+ 4+.+ 10.!+4+.+ 10.!+

4 1+ 4+.+ 10.!+3+.+ 1.

! 1$+ 3=.+ 13.10+.+ 0!.++

01+ 3!.+ 14.0$1+.+ !+.++

00+ 31.4 1!.$1

%he table sets out the AP and MP data used to draw the curves. *igure 11.!shows the curves and the relationships. When the AP curve rises the AVC curvefalls and vice versa. When the MP curve rises the MC curve falls and vice versa.


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4. Sue(s Surfboards# in problems 0 and 3# rents thefactor" building and the rent is increased b" ;0++ aweek. &f other things remain the same# how doSue(s Surfboards( short-run average cost curvesand marginal cost curve change.

%he rent is a fixed cost# so total fixed costincreases. %he increase in total fixed costincreases total cost but does not change totalvariable cost. 5verage fixed cost is total fixedcost per unit of output. %he average fixed costcurve shifts upward. 5verage total cost is totalcost per unit of output. %he average total costcurve shifts upward. %he marginal cost curveand average variable cost curve do not change.

!. Workers at Sue(s Surfboards# in problems 0 and 3#

negotiate a wage increase of ;1++ a week for eachworker. &f other things remain the same# explainhow Sue(s Surfboards( short-run average cost curveand marginal cost curve change.

%he increase in the wage rate is a variable cost#so total variable cost increases. %he increase intotal variable cost increases total cost but totalfixed cost does not change. 5verage variablecost is total variable cost per unit of output. %heaverage variable cost curve shifts upward. 5verage total cost is total cost perunit of output. %he average total cost curve shifts upward. %he marginal cost

curve shifts upward. %he average fixed cost curve does not change.

. Sue(s Surfboards# in problem 0# bu"s a second plant and the output produced b"each worker increases b" !+ percent. %he total fixed cost of operating each plant is;1#+++ a week. Each worker is paid ;!++ a week.

a. 2alculate the average total cost of producing 1=+ and 04+ surfboards a weekwhen Sue(s Surfboards operates two plants. raph these points and sketch the ATC curve.

%o calculate the average total cost when two plants are operated# recall that totalcost is the cost of all the factors of production. *or example# when 4 workers areemplo"ed the" now produce 04+ surfboards a week. With 4 workers# the totalvariable cost is ;0#+++ a week and the total fixed cost is 6coincidentall" also7;0#+++ a week. @ence the total cost is ;4#+++ a week. %he average total cost of producing 04+ surfboards is ;1. a surfboard. Similarl" the average total costof producing 1=+ surfboards is ;1$.44. %o graph the ATC curve the average totalcosts at all the 'uantities are re'uired. *igure 11. shows the average total costcurve# ATC 0 when Sue(s operates two plants. 6&t also shows Sue(s average totalcost curve# ATC 1# when Sue operates one plant.7


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b. %o produce 1=+ surfboards a week# is itefficient to operate one or two plants?

%he long-run average cost curve is madeup of the lowest parts of the firmAs short-run average total cost curves when the

firm operates one plant and two plants.%he long-run average cost curve isillustrated in *igure 11. as the darker part of the two ATC curves. 5t lower levels of output the LRAC curve isderived from operating one plant whileat higher levels it is derived fromoperating two plants. %he LRAC curveshows that to produce 1=+ surfboards itis efficient to operate 1 plant.

c. %o produce 1+ surfboards a week# is it

efficient for Sue(s to operate one or two plants?%he LRAC curve shows that to produce 1+ surfboards it is efficient to operate 1 plant.

. 5irlines Seek 9ut Bew Wa"s to Save on *uel as 2osts Soar

%he financial pain of higher fuel prices is particularl" acute for airlines because it istheir single biggest expense. C D5irlines pump about #+++ gallons into a oeing3 and as much as +#+++ gallons into the bigger 4 et. C Each generation ofaircraft is more efficient. 5t Borthwest# the 5irbus 533+ long-range ets use 3= percent less fuel than the 2-1+s the" replaced# while the 5irbus 531$ medium-range planes are 0 percent more efficient than 2-$s. C

Te !e" #$r% Time Fune 11# 0++=

a. &s the price of fuel a fixed cost or a variable cost for an airline?%he price of fuel is a variable cost for an airline.

b. Explain how an increase in the price of fuel changes an airline(s total costs#average costs# and marginal cost.

5n increase in the price of fuel raises an airline(s total cost# its average totalcost# its average variable cost# and its marginal cost. &t does not change theairline(s average fixed cost or total fixed cost.

c. raw a graph to show the effects of an increase in the price of fuel on an airline(sTFC, TVC # AFC # AVC # and MC curves.


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*igure 11. shows an airline(s TFC and TVC curves> *igure 11.= shows anairline(s AFC # AVC # and MC curves. %he increase in the price of fuel has noeffect on the airlines fixed cost# so the TFC and AFC curves do not change. %heincrease in the price of fuel raises the firm(s variable costs and its total costs. 5sa result the firm(s TVC # AVC and MC curves shift upward as illustrated in thefigures from the curves labeled G+Hto the curves labeled G1H.

d. Explain how a technological advance that makes an airplane(s engines more fuelefficient changes an airline(s total product# marginal product# and average product.

%his situation is an example of technological change that is embodied in capital.%his change will allow the airline to produce more output,passenger miles,


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using fewer resources. @ence the airline(s total product# marginal product# andaverage product all increase.

e. raw a graph to illustrate the effects of more fuel efficient aircraft on an airline(sTP # MP # and AP curves.

*igure 11.$ shows the airline(s TP curves. %he new engines shift the TP curveupward from TP + to TP 1. *igure 11.1+ shows the airline(s MP and AP curves.%hese curves also shift upward as a result of the new fuel efficient engines.


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f. Explain how a technological advance that makes an airplane(s engines more fuelefficient changes an airline(s average variable cost# marginal cost and averagetotal cost.

%he airline(s average variable cost and marginal cost both decrease. %he newengines that use the new technolog" are presumabl" more expensive than the

older# less fuel efficient engines. %he engines are a fixed cost. So at lower levelsof output the new average total cost is higher than the old average total costwhile at larger levels of output the new average total cost is lower than the oldaverage total cost.

g. raw a graph to illustrate how atechnological advance that makes anairplane engine more fuel efficientchanges an airline(s AVC # MC # and ATCcurves.

*igure 11.11 illustrates these changes.%he airline(s AVC and MC curves shift

downward as indicated b" the shift fromthe gre" curves labeled G+H to the black curves labeled G1H. 5t lower levels of output the ATC curve shifts upward andat larger levels of output the ATC curveshifts downward.

=. %he table shows the production functionof Fackie(s 2anoe Iides. Fackie(s pa"s ;1++ a da"for each canoe it rents and ;!+ a da" for eachcanoe operator it

hires.a. raph the ATC

curve for and# for ! rides is ;0#!++.%he average total cost is calculated b" dividing thetotal cost b" the 'uantit" of rides. %hese averagetotal costs are plotted in *igure 11.10. 6%heaverage total cost curve for one plant# ATC 1# is thesame as the thicker curve through the first 4 points.7

8abor

6workers per da"7

9utput

6rides per da"7


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b. 9n "our graph in a# plot the ATC curve for and the average cost of producing =! rides is ;4.+.

d. What is Fackie(s minimum efficient scale?Fackie(s minimum efficient scale is the smallest 'uantit" at which the long-runaverage cost is the lowest. Fackie(s minimum efficient scale is ! canoe rideswhere# with one plant# the average total cost is ;3=.4.

e. Explain how Fackie(s uses its LRAC cost curve to decide how man" canoe to rent.Fackie(s will use its long-run average total cost curve b" building the si)e of the plant that minimi)es its long-run average cost at the level of output that Fackie(s

expects to produce.f. oes Fackie(s production function feature economies of scale or diseconomies of

scale?Fackie(s has both economies of scale for up to ! canoe rides and thendiseconomies of scale for more than ! canoe rides.

$. usiness oot 2amp

5t a footwear compan" called 2aboots# sales rose from ;1+#+++ in 0+++ to ;0.3million in 0++. ut in 0++ sales dipped to ;1.! million. Foe" and


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*igure 11.13 shows the downward shift in the total product curve and *igure11.14 shows the downward shift in the marginal product curve. %he flood andlack of morale shift the TP and MP curves downward from TP 1 to TP 0 and from MP 1 to MP 0.


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1+. Bo Beed for Economies of Scale

&llinois %ool Works &nc. might not seem like an incubator for innovation. %he $3-"ear-old compan" manufactures a hodgepodge of mundane products# fromautomotive components and industrial fasteners to )ip-strip closures for plastic bags C and dedicates production lines and resources to high-volume products. 5

line will run onl" those three or four products. C Iuns are much longer and moreefficient. " ph"sicall" linking machines C the" are able to eliminate work in process and storage areas C 5ll the material handling and indirect costs arereduced.

(u&ine&& )ee% # 9ctober 31# 0++!

a. @ow would "ou expect Gph"sicall" linking machinesH to affect the firm(s short-run product curves and short-run average cost curves?

" Gph"sicall" linking machines#H for an" amount of labor the firm can producemore than before. %he plant(s total product increases so the short-run total product curve shifts upward. %he marginal product and average product curvesalso shift upward. 5s a result of the increase in the average product# the firm(s

short-run average variable cost and average total cost both decrease so that theaverage variable cost curve and average total cost curve shift downward.

b. raw a graph to show "our predicted effects of Gph"sicall" linking machinesH onthe firm(s short-run product curves and cost curves.


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*igure 11.1! shows theeffect of ph"sicall" linkingmachines on &llinois %ool(stotal product curve. %he total product curve shifts upwardfrom TP 1 to TP 0. *igure11.1 shows the effects on&llinois %ool(s marginal product and average productcurves. %hese curves shiftupward from AP 1 to AP 0 forthe average product of laborand from MP 1 to MP 0 for themarginal product of labor.*igure 11.1 shows theeffect of ph"sicall" linking

machines on &llinois %ool(s cost curves. %he costs fall so that all the cost curvesshift downwards: %he average variable cost curve shifts downward from AVC 1 to AVC 0# the average total cost curve shifts downward from ATC 1 to ATC 0# andthe marginal cost curve shifts downward from MC 1 to MC 0.

c. Explain how concentrating Gproduction lines and resources to high-volume productsH can influence long-run average cost as the output rate increases." speciali)ing in Ghigh-volume productsH the firm will be able to eno"economies of scale. &n other words# with this speciali)ation# as the firmincreases its production its long-run average costs will decline.

11. rain


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Ever" morning millions of 5mericans confront the latest trend in commoditiesmarkets at their kitchen table. C Iising prices for crops C have begun to drive upthe cost of breakfast.

Te *+$n$mi&' # Ful" 01# 0++

Explain how the rising price of crops affects the average total cost and marginal

cost of producing breakfast cereals.When producing cereal# the cereal crops used are a variable factor of production. 5n increase in the price of these crops boosts the firms( averagetotal cost and the firms( marginal cost of producing cereal.

answer to chapter 11 p and a.docx

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