End of Chapter Problems

1. a. The daily cost of Process A is $130 [= ($20 x 4 workers) + ($25 x 2 machines)] and the daily cost of Process B is $135 [= ($20
x 3 workers) + ($25 x 3 machines)]. Because Process A is cheaper than Process B, it maximizes productive efficiency.
b. The daily cost of Process A is $700 [= ($100 x 4 workers) + ($150 x 2 machines)] and the daily cost of Process B is $750 [=
($100 x 3 workers) + ($150 x 3 machines)]. Because Process A is cheaper than Process B, it maximizes productive efficiency.

2. a. Rodriguez's total explicit costs, which include rent, taxes and inventory costs, are $390,000 (= $25,000 + $15,000 + $350,000).
Rodriguez's total implicit costs, which include normal profit and implicit wages, are $106,000 [= (0.20 x $80,000) + $90,000].
b. The store's accounting profit, which is found by subtracting explicit costs from total revenue, is $90,000 (= $480,000 -
$390,000). The store's economic profit, which is found by subtracting both explicit costs and implicit costs from total revenue, is
(-)$16,000 (= $480,000 - $390,000 - $106,000).
c. Because the variety store is making an economic loss, Rodriguez should consider closing down this business.

3. a. Depreciation is a fixed cost because it is limited to the business's fixed inputs such as machinery and buildings.
b. Employee health benefits are a variable cost because these benefits vary with the number of workers employed by the business.
c. Lumber is a variable cost because it is a material input that varies with the business's output.
d. Property insurance is a fixed cost because is related to the restaurant's fixed inputs such as furniture and equipment.
e. Gasoline is a variable cost because it is a material input that varies with the business's output.

4. a.

(1) (2) (3) (4)

Labour Total Product Marginal Product Average Product
(workers per day) (pots per day) (pots per day) (pots per day)
0 0
[100]
1 100 [100]
[180]
2 280 [140]
[230]
3 510 [170]
[50]
4 560 [140]
[-10]
5 550 [110]

The marginal products in column 3 are found by subtracting the total product with the previous number of workers from the total
product with the new number of workers. For example, when moving from 0 to 1 workers, marginal product is 100 (= 100 - 0)
pots. The average products in column 4 are found by dividing the relevant total product by the relevant number of workers. For
example, at a 1 worker, average product is 100 (= 100 / 1) pots.
b. Marginal product rises when the first, second, and third workers are hired, since the marginal product of the second worker
(180 pots) exceeds that of the first worker (100 pots), and the marginal product of the third worker (230 pots) exceeds that of the
second worker. Marginal product falls and is positive when the fourth worker is hired, since marginal product is declining (from
230 to 50 pots). Marginal product is negative (-10 pots) when the fifth worker is hired. Meanwhile, total product in this
employment range is falling.
c. In the left graph the 6 total product values are plotted at the employment levels of 0, 1, 2, 3, 4, and 5. In the right graph the 5
points of the marginal product curve are plotted halfway between the relevant employment levels on the horizontal axis, which
means the marginal product for the first worker is positioned at a horizontal coordinate of 0.5 [= (1 + 0) / 2] workers, for the
second worker at a horizontal coordinate of 1.5 [= (2 + 1) / 2] workers and so on. The 5 average product values are plotted at the
employment levels of 1, 2, 3, 4, and 5 workers. The marginal product curve crosses the average product curve where the average
product curve reaches a maximum.
5. a.

(2) (3)
(8) (9)
(1) Total Marginal (4) (5) (7) (10)
(6) Average Average
Labour Product Product Fixed Variable Marginal Average
Total Cost Fixed Variable
(workers (cars (cars Costs Costs Cost Cost
($) Cost Cost
per hour) parked parked per ($) ($) ($) ($)
($) ($)
per hour) hour)
0 0 25 0 [25.00]
[40] [0.50]
1 40 25 20 [45.00] [0.63] [0.50] [1.13]
[52] [0.38]
2 92 25 40 [65.00] [0.27] [0.43] [0.71]
[40] [0.50]
3 132 25 60 [85.00] [0.19] [0.45] [0.64]
[28] [0.71]
4 160 25 80 [105.00] [0.16] [0.50] [0.66]
[20] [1.00]
5 180 25 100 [125.00] [0.14] [0.56] [0.69]

The marginal products in column 3 are found by subtracting the total product with the previous number of workers from the total
product with the new number of workers. For example, when moving from 0 to 1 workers, marginal product is 40 (= 40 - 0) pots.
The total costs in column 6 are found adding together fixed and variable costs at each quantity of output. For example, at 40 cars
parked the total cost is $45 (= $25 + $20). The marginal costs in column 7 are found by subtracting total cost with the previous
quantity from total cost with the new quantity and then dividing the result by the associated change in quantity. For example,
when moving from 0 to 40 cars parked, the difference in total cost is $20 (= $45 - $25) which is then divided by the change in
quantity of 40 cars, giving $0.50 [= ($20 / 40)]. The average fixed costs in column 8 are found by dividing the relevant fixed cost
by the relevant quantity. For example, at a quantity of 40 cars parked average fixed cost is $0.63 [= ($25 / 40)]. The average
 variable costs in column 9 are found by dividing the relevant variable cost by the relevant quantity. For example, at a quantity of
40 cars parked average variable cost is $0.50 [= ($20 / 40)]. The average costs in column 10 are found by dividing the relevant
total cost by the relevant quantity. For example, at a quantity of 40 cars parked average cost is $1.13 [= ($45 / 40)].
b. Because each of the 5 marginal cost values is plotted halfway between the relevant quantities on the horizontal axis, they are
positioned at 20 [= (40 + 0) / 2] cars parked, 66 [= (92 + 40) / 2] cars parked, 112 [= (132 + 92) / 2] cars parked, 146 [= (160 +
132) / 2] cars parked, and 170 [= (180 + 160) / 2] cars parked. The 5 average variable cost and 5 average cost values are plotted at
the relevant quantity levels: 40, 92, 132, 160 and 180 cars parked.
c. Marginal product begins to fall when the third worker is hired, since marginal product decreases from 52 to 40 cars per hour.
This is related to the point at which marginal cost begins to rise from its minimum of $0.38 to $0.50, when moving from 66 to
112 cars parked. Once each new worker adds less to total product, the extra cost of this new output begins to rise.
d. Average variable cost and marginal cost pass through the same set of values at a quantity of 92 cars, while average cost and
marginal cost pass through the same set of values at a quantity of 132 cars.

6. a. A craft such as handmade pottery has a long-run average cost curve with an extended horizontal range and a zero slope. This
reflects constant returns to scale because an expansion of output requires an exact repetition of production methods, so that inputs
and output vary by the same percentage.
b. A sophisticated manufacturing process such as the production of smartphones has a long-run average cost curve with an
extended downward sloping range and a negative slope. This is because an expansion of output allows for added specialization of
labour and capital, so that output rises more quickly than inputs.
c. The growing of an exotic coffee variety has a long-run average cost curve with an extended upward sloping range and a
positive slope. This reflects diseconomies of scale, since limited resource supplies mean that an increase in inputs does not lead to
as large a percentage increase in output.
d. E-book publishing is an industry in which most of the inputs in the production process, such as those needed for distribution
and marketing, are needed at the outset, with few new inputs being required to produce more units. Therefore this industry has a
long-run average cost curve with an extended downward sloping range and a negative slope. This reflects economies of scale,
since output can expand more rapidly than inputs.

7. a. As output increases, total cost and variable cost both rise in ways identical to one another. In the first output range total cost
and variable cost both rise more slowly. Then they start rising more rapidly. Fixed costs stay constant at $500 at every quantity.
b. Marginal cost has its usual 'J'-shape, first falling and then rising. Once marginal cost begins to rise, total cost and variable cost
both start to rise at an increasing rate.
c. In the first output range (up to the minimum point on the marginal cost curve, shown by point a in the graph on the right),
increasing marginal returns apply to this business. Because each new worker produces more extra output than the one before,
both total cost and variable cost rise more slowly while marginal cost falls. After point a, diminishing marginal returns mean that
each new worker produces less additional output than the one before, so that total cost and variable cost rise more quickly while
marginal cost rises.

8. The first point has a horizontal coordinate of 40, which is the midpoint of the two associated output levels, 0 and 80 T-shirts [40
= (80 + 0) / 2]. The second point has a coordinate of 140 [= (200 + 80) / 2], the third a coordinate of 225 [= (250 + 200) / 2], the
fourth a coordinate of 260 [= (270 + 250) / 2], and the fifth a coordinate of 275 [= (280 + 270) / 2].
9. Governments can help reduce the price of knowledge (for example, by funding research and development, or by subsidizing
knowledge-producing industries). This helps reduce one of the main fixed costs of knowledge-based industries, thereby raising
profits and spurring expansion in these industries.