GE273.U7.

ProblemSet1-Instructor

Problem Set 1 Answer Key (For Instructors Use Only)

Problem 2.5, page 349 Award up to 100 points.
A, D, and E are fixed costs because they do not change as the quantity of pizzas produced
increases. B and C are variable costs because they increase as the quantity of pizzas produced
increases.
Problem 3.3, page 350 Award up to 100 points.
Quantity
of Workers

Total
Output

Marginal
Product
of Labor

Average
Product
of

Labor
0

400

400

400

900

500

450

1,500

600

500

1,900

400

475

2,200

300

440

2,400

200

400

2,300

-100

329

Problem 5.3, page 351 Award up to 100 points.

a)

Total Variable Cost (TVC) is total cost fixed cost = $30,000 $10,000 = $20,000 when
Q = 10,000 tennis balls

b)

Average variable cost (AVC) = variable cost/output = TVC/Q = $20,000/10,000 = $2

Average fixed cost (AFC) = fixed cost/output = TFC/Q = $10,000/10,000 = $1
when Q =10,000.

c)

The gap must get smaller as output rises because ATC = AVC + AFC and AFC falls as
output rises. So, the dollar difference between ATC and AVC is greater when the output
of tennis balls is 10,000.

Problem 1.4, page 550 Award up to 100 points.

To maximize profits, Frank equates the wage to the marginal revenue product, so the marginal
revenue product must be $8. Marginal revenue product = marginal product x price.
So, in this case, marginal product = (marginal revenue product)/price = $8/$1.60 = 5 boxes per
worker per hour.