Businesses

1. Businesses Al’s Sub Shop Al and Dale’s Sub Station Subway

2. Businesses Liability Sharing Limited? Knowledge? Number of Owners Financing? Unlimited? Profits? proprietorship ______ ______ ___ ______ ______ ___ partnership ______ ______ ___ corporation

3. Businesses Number Receipts proprietorship partnership corporation 8 10 20 5 72 85

4. Business explicit Costs implicit total economic Profits normal accounting

5. Production Costs Total Fixed Costs rent Do not change with output Total Variable Costs bourbon scotch beer Do change with output Total Costs = TFC + TVC Production times Long Run The factory size can change Short Run: Factors like labor and raw materials can be changed labor raw materials

6. Unit Production Costs Average Fixed Costs Average Variable Costs Average Total Costs = ?+? MarginalCost Change in cost with 1 more output Do change with output Do not change with output

7. A Problem Marcia Deal bakes and decorates large, elaborate, multi-layered, special occasion cakes. She produces these in her own home without any help, unless she has a large number of orders on a particular day.

8. The Problem With the following information, complete the table The total cost of producing 5 cakes is $135 Marcia’s total fixed cost for 1 cake is $25 The marginal cost for the 8th cake is $91 The ATC per cake when 3 cakes or when 4 cakes are made is $25 The total variable cost of producing 7 cakes is $220 The marginal cost of the 6th cake is $45 The total cost of 2 cakes is $60 The total variable cost for 1 cake is $25 Why is the Marginal Cost of the 7th and 8th cakes fairly high?

10. $120 110 100 90 80 70 60 50 40 30 20 10 0 Average Total Cost and Marginal Cost 1 2 3 4 5 6 7 8 Number of Cakes

11. If Marcia can sell from 0 - 8 cakes at $40 each, how many will she choose to produce and sell per day if she is trying to maximize her profits?? Complete the table to check Do the numbers in the Total Profit column and in the Marginal Revenue and Marginal Cost columns support that?

13. On the graph, plot the total cost of producing from 0 – 8 cakes. Use the data from the table On the second graph, plot the average total cost and marginal cost of producing from 0 – 8 cakes. Plot the marginal cost at the midpoints Why does total cost exhibit this pattern in this exercise?

14. $350 300 250 200 150 100 50 0 Total Cost 1 2 3 4 5 6 7 8 Number of Cakes

15. The Production Function Output TFC TVC TC 0 100 0 100 150 190 220 260 320 400 500 620 770 1000 1 50 ___ ___ 100 100 100 100 100 100 100 100 100 100 ___ ___ 2 90 ___ ___ 3 120 ___ ___ 4 160 5 220 ___ ___ ___ ___ 6 300 7 400 ___ ___ ___ ___ 8 520 9 670 ___ ___ ___ ___ 10 900

16. The Production Function: Costs Output AFC AVC ATC MC 50 40 30 40 60 80 100 120 150 230 0 (TFC/output)(TVC/output) (TC/output)(TC1-TC0) 50 45 40 40 44 50 59 65 74 90 150 95 73 65 64 67 73 78 85 100 100 50 33 25 20 17 14 12 11 10 1 2 3 4 5 6 7 8 9 10 1 ________ ________ ________ _____ 2 ____________ ____________ ____________ _______ 3 ____________ ____________ ____________ _______ 4 ____________ ____________ ____________ _______ 5 ____________ ____________ ____________ _______ 6 ____________ ____________ ____________ _______ 7 ____________ ____________ ____________ _______ 8 ____________ ____________ ____________ _______ 9 ____________ ____________ ____________ _______ 10 ____________ ____________ ____________ _______

17. Total Costs 900 Cost 800 700 600 Total Cost 500 400 Total Variable Cost 300 200 Total Fixed Cost 100 0 6 7 8 9 10 3 4 5 1 2 Output

18. 90 80 Cost 70 ATC 60 50 and 40 MC 30 20 AVC Graphed 10 AFC 0 6 7 8 9 10 3 4 5 1 2 Output

19. Long-Run Average Total Cost Gets more efficient as size increases Gets less efficient as size increases Efficient Range of Production LRAC 600,000 Economies of Scale Diseconomies of Scale 500,000 400,000 300,000 200,000 Constant Returns to Scale 100,000 0 6 7 8 9 10 3 4 5 1 2 Houses Built

20. Long Run Costs Economies of Scale More efficient as size increases Diseconomies of Scale Less efficient as size increases Constant Returns to Scale Efficient Range of Production

21. The Production Function The recipe: going from inputs to outputs Efficient Production The least cost combination of inputs. It varies by firm

22. The Law of Diminishing Returns In the beginning, output increases with each unit added, but at some point output will begin to decrease with each additional unit of a resource. Like Labor ATC curve goes down as efficiency increases Then begins to go up

23. The Production Function: Output Data: Output Labor Total Marginal Average 0 0 ___ 3 ___ 3 1 3 ___ 5 ___ 4 2 8 ___ 4 ___ 4 3 12 ___ 3 3.75 ___ 4 15 2 ___ ___ 3.4 5 17 ___ 1 ___ 3 6 18

24. The Production Function: Output Total Output Output 18 15 12 9 6 3 0 1 2 3 4 6 5 Quantity of Labor

25. The Production Function: Output Average andMarginal Output 6 5 4 3 2 1 0 1 2 3 4 6 5 Quantity of Labor

26. 20 Questions

27. Which of the following is most likely to be an implicit cost of production? • property taxes on a building owned by the firm • transportation costs paid to a trucking supplier • c. rental payments for a building utilized by the company and rented from another party • d. interest income foregone on funds invested in the firm by the owners 2. The law of diminishing returns a. explains why marginal cost eventually increases as output expands. b. implies that average fixed cost will remain unchanged as output expands. c. is true for physical production activities but not for activities such as studying. d. applies to a capitalist economy but would be irrelevant if the means of production were owned by the state. 3. Which of the following represents a long-run adjustment? a. the hiring of four additional cashiers by a supermarket b. a cutback on purchases of coke and iron ore by a steel manufacturer c. construction of a new assembly-line plant by a car manufacturer d. the extra dose of fertilizer used by a farmer on his wheat crop

28. 4. The short-run average total cost (ATC) curve of a firm is U-shaped because a. larger firms always have lower per-unit costs than smaller firms. b. at low levels of output, AFC will be high, while at high levels of output, MC will be high as the result of diminishing returns. c. diminishing returns will be present when output is small, and high AFC will push per-unit cost to high levels when output is large. d. diseconomies of scale will be present at both small and large output rates. 5. When costs that vary with the level of output are divided by the output, you have calculated a. total changing cost. b. total fixed cost. c. average fixed cost. d. average variable cost. 6. A downward-sloping portion of a LR average total cost curve is the result of a. economies of scale. b. diseconomies of scale. c. diminishing returns. d. the existence of fixed resources. 7. In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be a. $25. b. $2,500. c. $5,000. d. $7,500.

29. At what output in the graph would the firm’s per-unit cost of production be minimized? • 3 b. 4 c. 5 d. 6 b. 4 • What is the firm’s approximate total cost when it produces three units? • 10 b. 16 c. 48 d. 60 c. 48 • What is the firm’s total cost when it produces four units? • 11 b. 15 c. 60 d. 75 c. 60 The average variable cost and average total cost for a firm are indicated in the graph. If the marginal cost curve were constructed, at what output would it cross the AVC curve? b. 15 • 10 b. 15 c. 20 d. 25 At what output should a the marginal cost curve cross the ATC curve? • 15 b. 20 c. 25 d. 30 b. 20