Assignment 2A

1. Say a firm has $100 in fixed costs and its average variable costs increase by $5 for
each unit, so that the cost of 1 is $25, the cost of 2 is $30, the cost of 3 is $35, and so
on.

a. Show VC, AFC, AVC, and MC in a table.

b. Graph the AFC, ATC, AVC, and MC curves associated with these costs.

c. Explain how costs would have to increase in order for the curves to have the
“normal” shapes of the curves presented in the text.
The average variable cost and marginal cost are not u-shaped because the
increase in variable cost is constant, therefore to make the graph becoming u-
 shape is average costs would have to be diminishing as output increases to give
the MC and AVC curves the normal shape.
2. Explain how each of the following will affect the average fixed cost, average variable
cost, average total cost, and marginal cost curves faced by a steel manufacturer:

a. New union agreement increases hourly pay.

Average fixed cost will remain the same because the total fixed cost is
unchanged for all the levels of output, so an increase in wage does not affect it.
Average variable cost will shift up because the total variable cost increases due
to increase in wages. The average total cost will also shift up because total cost
increases due to an increase in total variable cost, thus also affect the average
total cost. The marginal cost will remain the same.

b. Local government imposes an annual lump-sum tax per plant.

Average fixed cost will shift up because lump-sum taxes increase the total fixed
cost of a firm, when total fixed cost increases then the average fixed cost also
increases. Average variable cost remains unchanged because average variable
cost does not change due to change in lump-sum tax. The average total cost
increases due to an increase in total fixed cost and thus, the average total cost
also increases. Marginal cost remains the same because of the total increases
by the same amount at each and every level of outcome.

c. Federal government imposes a “stack tax” on emission of air pollutants by steel

mills.
The tax of pollution increases the fixed cost of a firm, thus average fixed cost
shifts upward. The average variable cost shifts upward because tax varies on the
unit of pollution created. The average total cost shift upward because tax
increases the average total cost. The marginal cost shifts up because additional
to total cost varies.

d. New steelmaking technology increases productivity of every worker.

Average fixed cost will remain the same because the total fixed cost is
unchanged for all the levels of output so technology increases productivity does
not affect it. The average variable cost will shift downward because total variable
cost decreases due to technology improvement. The average total cost will shift
downward because total cost decreases due to decrease in total variable cost,
thus will also affect average total cost. Marginal cost remains the same because
of the total increase by the same amount at every level of output.

3. Say that a firm has fixed costs of $100 and constant average variable costs of $25.

a. Show AFC, VC, AVC, and MC in a table.

 b. Graph the AFC, ATC, AVC, and MC curves.

c. Explain why the curves have the shapes they do.

The AFC curve has its normal shape because AVC do not change, MC curve is
coincident with AVC curve. The ATC curve us always falling, since the costs are
always above the MC curve.

d. What law is not operative for this firm?

The law of diminishing marginal productivity is not operative for this firm.

4. One farmer can grow 1,000 bushels of corn on 1 acre of land with 200 hours of labor
and 20 pounds of seed. Another farmer can grow 1,000 bushels of corn on 1 acre of
land with 100 hours of labor and 20 pounds of seed.
 a. Could both methods be technically efficient?
Because the second farmer can produce the same amount of corn with fewer
inputs, both methods cannot be technically efficient. Technical efficiency in
production means that as few inputs as possible are used to produce a given
output. Therefore, only the second farmer is technically efficient.

b. Is it possible that both of these production processes are economically efficient?

It is not possible for both to be economically efficient because the first farmer
uses more total inputs than the second farmer. Economic efficiency means using
the method that produces a given level of output at the lowest possible cost. All
economically efficient methods are also technically efficient, so it is not possible
for both methods to be economically efficient either.

5. Sea lions have been depleting the stock of steelhead trout. One idea to scare sea
lions off the Washington State coast is to launch fake killer whales, predators of sea
lions. The cost of making the first whale is $16,000—$5,000 for materials and
$11,000 for the mold. The mold can be reused to make additional whales, so
additional whales would cost $5,000 apiece.

a. Make a table showing the total cost and average total cost of producing 1 to 10
fake killer whales.

b. Does production of fake whales exhibit the diseconomies of scale, economies of

scale, or constant returns to scale?
The production of fake whales exhibits the economies of scale, shown by the
falling ATC.

c. What is the fixed cost of producing fake whales?

The fixed cost of producing fake whales is $11,000.

d. What is the variable cost of producing fake whales?

The variable cost of producing fake whales is $5,000.