ECON 300 EXAM 2 Notes Chapter 7 Class Prep 1 Jose rents office space for 20K year He uses the office to fill out tax returns for 1 000 clients year If the office rent increases to 25K year the marginal cost of filling out tax returns will a Not change 2 Which of the following is an example of a sunk cost a The amount a company originally paid for specialized equipment for a plant 3 At the point where average variable cost reaches its minimum value a Average variable costs marginal cost 4 In the short run when some inputs are fixed marginal cost must eventually rise as a firm s output increases because a There will eventually be diminishing marginal products for the firm s variable inputs 5 When the cost minimizing combination of inputs is being used and there is no corner solution a The isoquant line is tangent to the isocost line 6 Let MPK be the marginal product of capital MPL be the marginal product of labor r be the price of capital w be the cost of labor and MRTS be the marginal rate of technical substitution The firm is a NOT minimizing the cost of production because MPK MPL If not how could the firm decrease the cost of production holding output constant b The firm could decrease the cost of production holding output constant by using more LABOR and less CAPITAL 7 Firm 1 produces product A only and firm 2 produces product B only Firm 3 produces the same amount of A as firm 1 AND the same amount of B as firm 2 All three firms use state of the art production techniques but firm 3 s total costs are less than the sums of the other two firms total costs We can conclude that there are a Economies of scope in producing products A and B 8 Which of the following is NOT a result of learning that helps a firm reduce its costs as its cumulative output increases a The firm can negotiate with suppliers for lower input prices Thur 2 18 Economic Costs EX You need 10 000 to buy capital to start your business The capital will be worth 9 500 at the end of the year The interest rate is 5 For each case find explicit implicit and total economic costs for the year For which is the cost lowest Case 1 Borrow 10 000 make one payment at the end of the year Explicit 500 interest on the loan Implicit 500 depreciation Total economic cost 1 000 Case 2 Use 4 000 of you savings borrow the other 6 000 make one payment at the end of the year Explicit 300 5 interest on the loan Implicit 200 5 foregone interest you could have earned on your 4 000 500 depreciation Total economic cost 1 000 EX Sam has his own lawn mowing business He brings in 5 700 of revenue each month Should he stay in business Explicit 100 gallons month 3 gallon 300 2 workers 1 600 worker month 3 200 Implicit Sam s time could earn 1 600 month at his best alternative employment 1 600 Sam owns 2 lawn mowers a truck and a utility trailer he could rent them to another firm for 600 month 600 Total economic cost 300 3 200 1 600 600 5 700 Total economic profit 5 700 5 700 revenue economic costs 0 STAY IN BUSINESS A FALSE stadium is a sunk cost look at additional costs benefits MC MR CLICKER Q A university should not disband its football team if it has already paid for the stadium CLICKER Q Suppose you have purchased a non refundable plane ticket and at the last moment you cannot take the trip You can sell the ticket You paid 700 for the ticket the cost of sending the ticket to someone through overnight mail is 20 and you spend 10 on a courier to get the ticket to the post office for overnight delivery what is the minimum you should accept for the ticket CLICKER Q After the 100th bicycle was produced the TC of production was 10 000 and FC were 4 000 The MC of the 100th bicycle was 80 Which of the following is true A 30 20 10 because the 700 is a sunk cost A All are incorrect If the company produced no bicycle its TC would have been zero FIXED COSTS AFC increased for the 100th bicycle decreases over time These figures are for long run production short run CLICKER Q After the 100th bicycle was produced the TC of production was 10 000 and FC were 4 000 The MC of the 100th bicycle was 80 AVC of the 100th bicycle is A 60 6 000 VC 100 Q AVC VC Q TC VC FC 10 000 VC 4 000 VC 6 000 CLICKER Q After the 100th bicycle was produced the TC of production was 10 000 and FC were 4 000 The MC of the 100th bicycle was 80 Which of the following is true A AVC increased and AC decreased Tue 2 23 CLICKER Q Which of the following would cause the AFC curve for cigarettes to shift up A increase in annual property tax FC doesn t vary with output increase in advertising expenditures FC campaign is not an input in the production process cost is spread out over how much you produce CLICKER Q Which of the following would shift the MC curve for cigarettes A 4 wage increase Long Run 1 Isoquant 2 All combinations of inputs that cost the same a Iso same b Quant quantity a C w L r K i w price of labor ii r price of capital EX C 1 000 w 10 r 20 GIVEN FIND K intercept L intercept Slope WORK C w L r K 1 000 10 L 20 K 20K 1 000 10 L K 50 0 5L ANSWER Slope 1 2 Rate the firm can exchange K for L in the market place at a constant cost EX C 1 200 w 10 r 20 GIVEN FIND K intercept L intercept Slope WORK C w L r K 1 200 10 L 20 K 20K 1 200 10 L K 60 0 5L ANSWER Slope 1 2 Rate the firm can exchange K for L in the market place at a constant cost 3 Conditions for Cost minimization a MRTS i Tangency condition 1 Recall from Chapter 6 a MRTS b i ii additional output per spent on L additional output per spent on K i Produce target level of output b F L K q a 4 Long run vs Short run Costs CLICKER Q The tax falls mostly on buyers if the price elasticity of demand is A less than the elasticity of supply 1 Incidence of Tax a Fraction of tax borne by consumers i Pass Through Fraction Chapter 8 Class Prep a Oranges 1 A good example of an industry that is nearly perfectly competitive is the market for 2 Which of the following is NOT a …