1 Principles of Microeconomics – Econ1014 Week 1 Homework Assignment (non-mandatory) Basic Math and Graphing Review and Opportunity Cost Please complete this and turn it in to the TA at the classroom door at the start of class on Wednesday, September 3rd, if you wish it to be grade for extra credit. It will be available to be picked up and you can review it with a TA by Tuesday of the following week. 1. Graphing One of the models we will deal with in this course this semester involves finding the relationship between production levels and the amount spent by a firm. Some firm spending is fixed; these costs don’t vary with the level of production and are called fixed costs. Some firm spending is variable; these costs change or vary with the level of production; these are called variable costs. Suppose the following tables give possible production levels for a firm (Q) and the fixed cost (FC), variable cost (VC) and total cost (TC=FC+VC) of producing each of these production levels, measured in U.S. dollars. a. Plot the following points that show these cost relationships, connecting the points for each together with a smooth line and labeling them as FC, VC or TC. Don’t forget to label your axes as well. Q FC VC TC 0 500 0 500 10 500 300 800 20 500 500 1000 30 500 600 1100 40 500 800 1300 50 500 1100 1600 60 500 1800 23002 b. How much is the firm spending on fixed inputs, variable inputs and how much is it spending in total if it produces 50 units of output? FC=$500 VC=$1100 TC=$1600 c. If the firm has only $1200 available to spend, what is the most it can produce? Q=35 units d. How much extra money does the firm spend on fixed inputs when it decides to increase its production from 10 units to 20 units? Fixed cost does not increase; this is why it is called fixed cost e. Calculate the slope of the fixed cost curve between 10 and 20 units. Does it matter which two points you choose on the FC curve to calculate the slope? Why or why not? Slope = rise/run=(change in fixed spending)/(change in production)=0/10=0 It doesn’t matter which two points we choose because the FC curve is a straight line and straight lines have a constant slope. The amount of fixed spending (the rise) is always the same regardless of how much we increase the production level (the run). 02004006008001000120014001600180020002200240026002800 0 5 10 15 20 25 30 35 40 45 50 55 60 U.S. $’s Quantity FC VC TC3 f. How much extra money does the firm spend on variable inputs when it decides to increase its production from 10 to 20 units? Variable input spending rises by $200 when production increases from 10 to 20 units. g. Calculate the slope of the variable cost curve between 10 and 20 units. Does it matter which two points you choose on the VC curve to calculate the slope? Why or why not? Slope = rise/run=(change in variable spending)/(change in production)=200/10=20 In this case it does matter which two points we choose because the variable cost curve is not a straight line so its slope is different at each point on the line; the increase in variable spending (the rise) is bigger between some production values (the run) than between some other production values. h. When the firm increases production from 30 to 40 units, what is the percentage change in spending on fixed inputs? Percentage change in fixed spending = (+$0/500) x100 = +0% i. When the firm increases production from 30 to 40 units, what is the percentage change in spending on variable inputs? Percentage change in variable spending = (+$200/600) x100 =+33% j. When the firm increases production from 30 to 40 units, what is the percentage change in spending on all inputs? Percentage change in total spending = (+$200/1100) x100 =+18% k. When the firm decreases production from 30 to 20 units, what is the percentage change in spending on fixed inputs? Percentage change in fixed spending = (-$0/500) x100 = 0% l. When the firm decreases production from 30 to 20 units, what is the percentage change in spending on variable inputs? Percentage change in variable spending = (-$100/600) x100 =-16.7% m. When the firm decreases production from 30 to 20 units, what is the percentage change in spending on all inputs? Percentage change in total spending = (-$100/1100) x100 =-9%4 2. Positive and Normative Statements Decide whether the following statements are positive or normative ones. a. Ban on smoking will reduce society’s medical expenses by 10%. Positive b. Ban on smoking should reduce society’s medical expenses by 10%. Normative c. Ban on smoking improved health of some of society’s members. Positive d. Ban on smoking improved health of all society’s members. Positive e. Ban on smoking should be imposed in order to improve society’s health and reduce its medical expenses. Normative Multiple Choice Questions This section requires you to understand how to solve the problems from the previous questions in order to answer a number of multiple choice questions. The purpose of this section is to illustrate how your economic problem solving skills will be used to answer the types of questions you will see on your exams. A. According to the information provided in question 1 found above, there is ______ relationship between production levels (Q) and the variable cost of production (VC). a. no b. a positive c. a negative d. an inverse e. none of the above B. According to the information provided in question 1 found above, when the producer increases production (Q) from 10 units to 20 units, its total cost of production (TC) increases by _____ units which is a percentage increase in cost equal to _____. a. $200; 25% b. $800; 20% c. $1000; 200% d. $500; 10% e. $0; 0% C. According to the information provided in question 1 found above, when the producer decreases production (Q) from 20 units to 10 units, its total cost of production (TC) decreases by _____ units which is a percentage decrease in cost equal to _____. a. $200; 25% b. $200; 100% c. $1000; 20% d. $200; 20% e. None of the