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M Economics The Basics 3rd Edition Mandel Solutions Manual 1
M Economics The Basics 3rd Edition Mandel Solutions Manual 1
Chapter 4
How Businesses Work
1. Profit is the difference between revenues and costs. Monthly profits are $40 million - $28
million = $12 million.
2. Nonprofit organizations, such as private universities and hospitals, also supply goods and
services. Governments provide services, such as police and education. And most child care
activities are still done by parents or other household members; most families are not run
3. Average product (of labor) is defined as total output divided by total labor. In other words,
the output per hour or output per worker. Therefore, at American Electric Power, the
average product of labor is 207 million megawatt-hours divided by 18,500 employees:
207,000,000 / 18,500 ≈ 11,190 megawatt-hours of electricity per worker. (The exact
answer is 11,189.1892.)
4.
a) The table, completed, should look like the one below:
1
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Technicians Completed per Day
1 5 5 5
2 10 5 5
3 14 4 4.67
4 17 3 4.25
5 20 3 4
b) A production function tells you, given the inputs, what the output is going to
be. The output should be on the vertical axis and input on the horizontal axis.
The production function should look like the one below.
c) If the new type of MRI machine can perform scans faster, one would expect
the production function, which shows the level of output for each given level
of input, to increase. Therefore, the entire production function should shift
upward, as shown below. (The specific size of the upward shift may vary, but
a correct graph will increase the number of scans completed for each possible
number of technicians.)
2
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
The MRI production function for a medical office with two
types of MRI machines.
c) The total cost of doing 10 scans per day is the sum of the labor cost ($400 from
above) and the capital cost (2 × $150 = $300). The total cost of doing 10 scans per
day is $400 + $300 = $700.
d) The variable cost of doing 17 scans per day is equal to the labor costs. The amount
of labor being used can be changed from day to day, but the MRI machines are on
a one-year lease, so these do not constitute a variable, or short-term, cost. Therefore,
the variable cost of doing 17 scans per day is the number of workers needed to
perform 17 scans (4) times the compensation to each worker ($200): 4 × $200 =
$800.
e) Since the MRI machines are on a one-year lease, they are a fixed cost. Regardless
of the level of production, the office currently has only two MRI machines. So the
fixed cost of performing 17 scans in a day is still 2 × $150 = $300.
6. Fixed or long-term costs are more difficult to change and take longer to have an effect.
Variable or short-term costs are those that can be quickly raised or lowered immediately.
a) Fixed cost.
b) Variable cost.
c) Fixed cost.
3
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
d) Variable cost.
7. a) The marginal cost is the added expense of producing one more unit of output. The
table, completed, should look like the one below:
b) The horizontal axis measures output, and the vertical axis measures marginal cost.
The cost curve graph should look like this:
c) The fixed cost is the cost shown when the output is zero. In this case, the fixed
cost is $200.
4
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
8. A business will keep expanding up to the point that marginal cost is equal to marginal
revenue. When marginal revenue per shirt equals $7 and the marginal cost per shirt
equals $10 the firm will continue to expand.
b) The completed table (for parts A & B) should look like the one below.
Bicycles Marginal
Repaired per Marginal Cost Revenue Revenue
Day (Number) Cost (Dollars) (Dollars) (Dollars) (Dollars)
0 100 0
1 150 50 80 80
2 200 50 160 80
3 260 60 240 80
4 330 70 320 80
5 410 80 400 80
6 500 90 480 80
7 600 100 560 80
8 710 110 640 80
10. a) A profit-maximizing business will increase production as long as marginal
revenue exceeds marginal cost. Therefore, this bicycle shop increases its profit by
repairing additional bicycles until it repairs the 5th bicycle. At this point, repairing
additional bicycles involves marginal cost greater than the marginal revenue. This
firm should repair 5 bicycles per day. The profit here is negative, because cost
($410) is greater than revenue ($400). The bicycle repair shop is losing $10 per
day. However, the cost of producing zero units is $100. This must be a fixed cost.
Therefore, producing zero units would cause larger losses of $100 per day.
Bicycles
Marginal Marginal
Repaired Cost Revenue
Cost Revenue
per Day (Dollars) (Dollars)
(Dollars) (Dollars)
(Number)
0 100 0 0 0
1 150 50 80 80
2 200 50 160 80
3 260 60 240 80
4 330 70 320 80
5 410 80 400 80
6 500 90 480 80
7 600 100 560 80
8 710 110 640 80
5
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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