Homework Ch 11 Output and Cost 1 The news clips list some decisions made by Starbucks January 21 2008 Starbucks will open 75 more stores abroad than originally predicted for a total of 975 February 25 2008 For three hours on Tuesday Starbucks will shut down every single one of its 7 100 stores so that baristas can receive a refresher course June 2 2008 Starbucks replaces baristas with vending machines July 18 2008 Starbucks is closing 616 stores by the end of March Short Run Decisions a time frame in which the quantity of at least one factor of production is fixed Long Run Decisions a time frame in which the quantities of all factors of production can be varied The decisions made on are short run decisions because they February 25 and June 2 change a variable factor of production but not a fixed factor of production The decisions made on are long run decisions because they January 31 and July 18 change Starbucks plant 2 The past expenditure on a plant that has no resale value is called a cost Sunk Cost The only costs that influence a firm s current decisions are the short run cost of changing its labor and the long run cost of changing its plant 3 The law of diminishing returns states that as a firm uses more of a factor of production with a given quantity of a factor of production the product of the factor eventually diminishes Diminishing Marginal Returns occur when the marginal product of an additional worker is less than the marginal product of the previous worker Law of Diminishing Return as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production the marginal product of the variable factor eventually diminishes variable fixed marginal variable Marginal product eventually diminishes because Marginal Product eventually diminishes even if no workers are promoted more and more workers are using the same capital and working in the same space 4 When marginal product exceeds average product product is increasing When average product exceeds marginal product product is decreasing average average 5 The table gives Sue s Surfboards total product schedule Labor workers per week Output surfboards per Average Product week surfboards per worker 1 30 30 30 1 2 70 35 35 2 3 120 40 40 3 4 160 40 5 190 38 6 210 35 Draw the four points on the average product curve using the information in the table Draw the average product curve Label it Average Product of Labor equal to the total product divided by the quantity of labor employed If 6 workers can produce 210 surfboards a week then average product is surfboards per worker 210 surfboards 6 workers 35 surfboards per worker 6 The table gives Sue s Surfboards total product schedule same as above Draw the four points on the marginal product curve beginning with the increase in labor from 1 to 2 workers per week Draw the marginal product curve Label it Marginal Product of Labor the change in total product that results from a one unit increase in the quantity of labor employed If 5 workers produce 190 surfboards a week and 6 workers produce 210 surfboards a week the marginal product of the 6th worker is surfboards 210 190 20 surfboards 7 Choose the correct statement When marginal product of labor is greater than average product of labor and marginal product of labor is either increasing or decreasing average product of labor is increasing 8 The graph shows the total product curve for a firm that produces handbags Marginal returns begin to diminish when the firm hires the worker sixth 9 Indicate whether each of the following statements is true or false The marginal cost curve intersects the average total cost curve at its maximum F The marginal cost curve intersects the average variable cost curve at its minimum T When marginal cost is greater than average variable cost average variable cost is increasing T When marginal cost is less than average total cost average total cost is decreasing T When marginal cost is greater than average fixed cost average fixed cost is increasing F 10 The marginal cost curve slops downward at low outputs because of The marginal cost curve eventually slopes upward because of Marginal Cost the increase in total cost that results from a one unit increase in output as output increases fixed cost does not change so changes in total cost are not attributable to fixed cost A falling average fixed cost has no effect on marginal cost The Law of Diminishing Returns as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production the marginal product of the variable factor eventually diminishes greater specialization and division of labor the law of diminishing returns 11 Sue s Surfboards hires workers at 500 a week Its total fixed cost is 1 000 a week The table shows the firm s total product schedule and the graph shows the cost curves Labor workers per week Output surfboards per week 1 30 2 70 3 120 4 160 5 190 6 210 When Sue s output is 190 surfboards a week the firm s total fixed cost is total variable cost is and total cost is Total Variable Cost dollars Total Cost dollars 500 1 500 500 1 000 1000 2000 1000 1000 1500 2500 2000 3000 1000 1500 2500 12 Sue s Surfboards hires workers at 500 a week It s total fixed cost is 1 000 a week The table shows the firm s total product schedule Labor Output Average Average Average Total Marginal workers boards Fixed Cost Variable Cost Cost per week per week Cost 1 30 33 33 16 67 50 12 5 2000 1000 30 500 30 1 33 33 16 67 1500 70 30 2 70 14 29 14 29 28 57 10 2500 500 70 2 2000 12070 3 120 8 33 12 50 20 83 12 5 4 160 6 45 12 90 19 53 16 66 5 190 5 26 13 16 18 42 25 6 210 4 76 14 29 19 05 50 7 220 4 55 15 90 20 45 when output is 30 surfboards a week average fixed cost is a surfboard and average variable cost is a surfboard 33 33 16 67 When output is 30 surfboards a week average total cost is a surfboard and when output increases from 0 to 30 surfboards a week marginal cost is a surfboard 50 16 66 1000 500 30 0 13 Sue s Surfboards rents the factory building in which it produces surfboards The rent is increased by 200 a week If other things remain the same the average fixed cost curve and the average variable cost curve shifts upward does not change If other things remain the same the average total cost curve and the marginal cost curve shifts upward does not change 14 The graph shows a firm s average fixed cost curve and average variable cost curve Draw a curve that is approximately the firm s