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CHAPTER 7
PRODUCTION AND COST IN THE FIRM
INTRODUCTION
This chapter describes key characteristics governing how firms operate in the short run and the long run.
Perhaps the most important concepts in the chapter are the shapes and the logic of the short-run and long-run
cost curves. These cost curves will be utilized throughout the microeconomics section to explain the firm’s
supply behavior. The appendix develops the use of input combinations using isocost lines and isoquants.
CHAPTER OUTLINE
I. Cost and Profit
We assume that producers try to maximize profit. Firms try to earn profit by transforming resources
into salable products.
A. Explicit and Implicit Costs

• Explicit costs: Actual cash payments for resources purchased in resource markets.
• Implicit costs: Opportunity costs of using resources owned by the firm or provided by
the firm’s owners. Require no cash payment and no entry in the firm’s accounting
statement.
B. Alternative Measures of Profit

• Accounting Profit: Total revenue minus explicit costs.
• Economic profit: Total revenue minus all costs, both implicit and explicit.
• Normal profit: The accounting profit earned when all resources used by the firm earn
their opportunity cost. When normal profit is earned, accounting profit equals implicit
costs.
II. Production in the Short Run
A. Fixed and Variable Resources

• Variable resources: Can be varied quickly to change the output rate.
• Fixed resources: Resources that cannot easily be altered.
• Short run: At least one resource is fixed; the size or scale of the firm is fixed.
• Long run: No resource is fixed; all resources can vary.
B. The Law of Diminishing Marginal Returns

• Total product: A firm’s total output.
• Production function: The relationship between the amount of resources employed and
total product or output produced.
• Marginal product, MP: The change in total product when a particular resource
increases by one unit, all other resources constant.
• Marginal product of labor: The change in total product resulting from an additional
unit of labor.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
78 Chapter 7 Production and Cost in the Firm
1. Increasing Marginal Returns: Increasing marginal product of a variable resource as

each additional unit of that resource is employed. As marginal product increases, the
firm experiences increasing marginal returns from labor because additional workers
can specialize and make more efficient use of the fixed resources.
2. Diminishing Marginal Returns: As more of a variable resource is added to a given
amount of a fixed resource, the marginal product eventually declines and could
become negative. The law of diminishing marginal returns is the most important
feature of production in the short run.
C. The Total and Marginal Product Curves

When marginal product
• Rises, total product increases at an increasing rate. Increasing marginal returns.
• Decreases, total product increases at a decreasing rate. Diminishing but positive marginal
returns.
• Is negative, total product is decreasing. Negative marginal returns.
• Is positive, total product is increasing.
III. Costs in the Short Run

• Fixed costs, FC: Costs that are independent of output and must be paid even if no output is
produced. Pay for fixed resources.
• Variable costs, VC: Cost of variable resources; change in the short run with changes in production.
A. Total Cost and Marginal Cost in the Short Run

1. Total Cost, TC: The sum of fixed cost and variable cost.
TC = FC + VC.
2. Marginal Cost, MC: The change in total cost divided by the change in output.
MC = ∆TC / ∆q.
• Changes in marginal cost (MC) reflect changes in the marginal productivity
(MP) of the variable resource. When marginal returns are increasing, the
marginal cost of output decreases.
• When marginal returns are diminishing, the marginal cost of output increases.
3. Total and Marginal Cost Curves: The slope of the total cost curve at each rate of
output equals the marginal cost at that rate of output.
4. Total cost curve: upward-sloping, inverted S-shape, starts on the vertical axis at the
fixed cost.
5. Fixed cost curve: straight horizontal line at the fixed cost
6. Variable cost curve: upward-sloping, inverted S-shape, starts at the origin. The
vertical distance between the total cost curve and the variable cost curve is always
equal to the fixed cost.
7. Marginal cost curve: U-shaped.
B. Average Cost in the Short Run

• Average Variable Cost, AVC: Variable cost divided by output or VC/q
• Average Fixed Cost, AFC: Fixed cost divided by output or FC/q
• Average Total Cost, ATC: Total cost divided by output or TC/q
• ATC and AVC curves are U-shaped. The ATC curve lies above the AVC curve. The
minimum point on the ATC curve lies to the right of the minimum point on the AVC
curve. The vertical distance between the ATC and AVC curves is the average fixed cost.
Chapter 7 Production and Cost in the Firm 79
C. Relationship Between Marginal Cost and Average Cost: Marginal cost pulls down average
cost where marginal cost is below average cost and pulls up average cost where marginal cost
is above average cost. The marginal cost curve is U-shaped; it intersects the ATC and AVC
curves at their minimums.
The law of diminishing marginal returns determines the shape of short-run cost curves:
• When the marginal product of labor increases, the marginal cost of output falls. When the
marginal product of labor decreases, the marginal cost of output increases. This gives the
MC curve its U-shape.
• When marginal cost is less than average cost, average cost falls.
• When marginal cost is above average cost, average cost rises.
IV. Costs in the Long Run: Long run is best thought of as a planning horizon. Firms plan for the long
run, but they produce in the short run.
A. Economies of Scale
• Long-run average cost curves are U-shaped because of economies and diseconomies of
scale.
• Forces that reduce a firm’s long run average cost as the scale of operation increases.
• A larger firm size allows for larger, more specialized machines and greater specialization
of labor. As the scale of a firm increases, capital substitutes for labor and complex
machines substitute for simples machines.
B. Diseconomies of Scale
• Forces that increase a firm’s long run average cost as the scale of operation increases.
• As the amount and variety of resources employed increase, so does the task of
coordinating all these inputs. Additional layers of management are needed to monitor
production; information gets distorted, reducing efficiency and increasing average cost.
C. Long-Run Average Cost Curve, LRAC: The curve indicating the lowest average cost of
production at each rate of output as the firm size is varied; the planning curve.
• Each short-run average cost curve is tangent to the long-run average cost curve: the least-
cost way of producing that particular rate of output.
Case Study: Scale Economies and Diseconomies at the Movies
• Constant Long-Run Average Cost: Long-run average cost neither increases nor
decreases with changes in firm size.
• Minimum Efficient Scale: The lowest rate of output at which a firm takes full advantage
of economies of scale; where long-run average cost is at a minimum.
D. Economies and Diseconomies of Scale at the Firm Level

• Plant level: a particular location
• Firm level: the firm is a collection of plants
• Large firms try to reduce diseconomies of scale: decentralize into smaller decision-
making groups
V. Conclusion
Only two relationships between resources and output underlie all the curves discussed in this chapter.
In the short run, it’s increasing and diminishing returns from the variable resource. In the long run, it’s
economies and diseconomies of scale
Appendix: A Closer Look at Production and Cost

The Production Function and Efficiency
• Production function: Identifies the most that can be produced per time period using various
combinations of resources, for a given level of technology.
• Technologically efficient: The production of the maximum possible output given the combination of
resources employed.
Isoquants: Curves that show all the technologically efficient combinations of two resources that produce a
certain rate of output.
• Greater rates of output are represented by isoquants farther from the origin.
• Have negative slopes.
• Do not intersect.
• Are usually convex to the origin.
• Have a slope that is the marginal rate of technical substitution (MRTS), which is the rate at which
labor can be substituted for capital without affecting output. MRTS = MPL / MPC.
Isocost Lines: Identify all combinations of capital and labor the firm can hire for a given total cost.
• Slope = -(TC/r) / (TC/w) = -w/r = the negative of the ratio of the input prices.
• Parallel because each reflects the same relative resource prices.
The Choice of Input Combinations: For a given rate of output, the firm minimizes its total cost by choosing
the lowest isocost line that is tangent to the isoquant.
The Expansion Path: Indicates the lowest long-run total cost for each rate of output.
CHAPTER SUMMARY
Explicit costs are opportunity costs of resources employed by a firm that take the form of cash payments.
Implicit costs are the opportunity costs of using resources owned by the firm. A firm earns a normal profit
when total revenue covers all implicit and explicit costs. Economic profit equals total revenue minus both
explicit and implicit costs.
Variable resources can be varied quickly to increase or decrease output. In the short run, at least one resource
is fixed. In the long run, all resources under the firm’s control are variable.
A firm may initially experience increased marginal returns as it takes advantage of greater specialization of the
variable resource. But the law of diminishing marginal returns indicates that the firm eventually reaches a point
where adding more units of the variable resource yields a decreasing marginal product.
The law of diminishing marginal returns from the variable resource is the most important feature of production
in the short run and explains why marginal cost and average cost eventually increase as output expands.
In the long run, all inputs under the firm’s control are variable, so there is no fixed cost. The firm’s long-run
average cost curve, also called its planning curve, is an envelope formed by a series of short-run average total
cost curves. The long run is best thought of as a planning horizon.
A firm’s long-run average cost curve, like its short-run average cost curve, is U-shaped. As output expands in
the long run, average cost at first declines because of economies of scale—a larger size allows for bigger and
more specialized machinery and a more extensive division of labor. Eventually, average cost stops falling.
Average cost may then be constant over some range. If output expands still further, the plant may experience
diseconomies of scale as the cost of coordinating resources grows. Economies and diseconomies of scale can
occur at the plant level-that is, at a particular location-and at the firm level with many plants and locations.
In the long run, a firm selects the most efficient size for the desired rate of output. Once that size is
constructed, some resources become fixed, so the firm is operating in the short run. Thus, the firm plans for the
long run but produces in the short run.
A firm’s production function specifies the relationship between resource use and the rate of output, given
prevailing technology and know-how. An isoquant is a curve that illustrates the possible combinations of
resources that produce a particular rate of output. An isocost line presents the combinations of resources the
firm can employ, given resource prices and the firm’s total budget. For a given rate of output—that is, for a
given isoquant—the firm minimizes total cost by choosing the lowest isocost line that just touches, or is
tangent to, the isoquant. The least-cost combination of resources depends on the productivity of resources and
their relative cost. Economists believe that although firm owners may not understand the material in this
appendix, they must act as if they do to maximize profit or minimize losses.
TEACHING POINTS
1. This chapter presents the construction of cost curves for the individual firm. Students who master this
material should have no problem understanding the sections of the text dealing with market structure.
The cost curves discussed in this chapter are inherently quantitative, and those students with weaker math
backgrounds need exercises that force them to derive average cost and marginal cost from the basics.
2. The chapter begins with a discussion of the meaning of the total and marginal products of labor, which is
the only variable resource considered in the short run. Exhibit 2 shows the relationship between labor
employed and output generated. Note that both increasing and diminishing returns are discussed. Point
out that marginal product can be negative while total product is still positive. Ask the students to explain
how this can happen.
3. It should not be hard to explain the concept of diminishing marginal returns. It is important to emphasize
that the additional units of the variable resource are not less capable than earlier units. As an example,
you might have students think about how total output at a fast food restaurant will change as additional
workers are added.
4. Exhibit 4 is particularly useful for class discussion. Some students find the numerical examples
particularly illuminating. An interesting way to approach this material is to leave certain parts of the
table blank and ask students to use the filled-in parts to guide them in completing the table. You need
delete only one table entry per line to make this an interesting exercise.
5. Exhibit 5 shows the relationship between the total cost curve and the marginal cost curve. Because
marginal cost is the slope of the total cost curve, it is natural to use the word slope in the classroom.
Another word that might prove illuminating for students is steepness. As the total cost curve becomes
steeper, marginal cost increases.
6. Exhibits 6 and 7 are crucial to understanding cost in the short run and must be covered with great care.
Because the marginal cost curve ultimately drives the variable and total cost curves, understanding why
diminishing marginal productivity leads to increasing marginal costs is absolutely essential. Once this is
understood relating marginal to average results in the characteristic U-shaped average variable and
average total cost curves. A clear way to depict the relationship between marginal and average is to use
the impact on the average class height when a tall or short student joins the class.
7. The long-run average cost curve should be presented as an envelope curve based on selection of the best
scale of production from the many possible scales for each output level on the basis of cost. The shape of
the long-run curve then does not depend on diminishing marginal product but on the existence of
economies and diseconomies of scale.
ANSWERS TO QUESTIONS FOR REVIEW

1. (Explicit and Implicit Costs) Amos McCoy is currently raising corn on his 100-acre farm and earning an
accounting profit of $100 per acre. However, if he raised soybeans, he could earn an accounting profit of
$200 per acre. Is he currently earning an economic profit? Why or why not?
Amos McCoy is not currently making an economic profit, despite the fact that he is making an
accounting profit. This is so because the accounting profit calculation does not take into account an
important implicit cost—the opportunity cost of not raising soybeans. Actually, McCoy is experiencing
an economic loss. According to our theory, he should get out of the corn business and begin growing
soybeans. This question highlights the important distinction between accounting profit and economic
profit.
2. (Explicit and Implicit Costs) Determine whether each of the following is an explicit cost or an implicit
cost:
a. Payments for labor purchased in the labor market
b. A firm’s use of a warehouse that it owns and could rent to another firm
c. Rent paid for the use of a warehouse not owned by the firm
d. The wages that owners could earn if they did not work for themselves
a) explicit; b) implicit; c) explicit; d) implicit
3. (Alternative Measures of Profit) Calculate the accounting profit or loss as well as the economic profit or
loss in each of the following situations:
a. A firm with total revenues of $150 million, explicit costs of $90 million, and implicit costs of $40
million
b. A firm with total revenues of $125 million, explicit costs of $100 million, and implicit costs of $30
million
c. A firm with total revenues of $100 million, explicit costs of $90 million, and implicit costs of $20
million
d. A firm with total revenues of $250,000, explicit costs of $275,000, and implicit costs of $50,000
Accounting profit = total revenue – explicit costs

Economic profit = total revenue – explicit costs – implicit costs
a. Accounting profit = $60 million; economic profit = $20 million
b. Accounting profit = $25 million; economic loss = –$5 million
c. Accounting profit = $10 million; economic loss = –$10 million
d. Accounting loss = –$25,000; economic loss = –$75,000
4. (Alternative Measures of Profit) Why is it reasonable to think of normal profit as a type of cost to the
firm?
Recall that firms produce output using four kinds of resources: natural resources, labor, capital, and
entrepreneurial ability. The owner of the firm supplies some of the resources that the firm employs.
Normal profit is the return to the entrepreneurial ability and other resources supplied by the firm’s
owners. If this profit is not as large as those individuals could earn in their best alternative situation,
they will switch the resources to that alternative. So, we can think of normal profit as being the minimum
return, or cost that is necessary to keep the firm running.
5. (Short Run Versus Long Run) What distinguishes a firm’s short-run period from its long-run period?
In the short run, at least one of the firm’s resources is fixed, usually the size of the firm. In the long run,
all the resources are variable. That is, the quantities of all resources can change to alter the firm’s level
of output, including the size of the firm.
6. (Law of Diminishing Marginal Returns) As a farmer, you must decide how many times during the year to
plant a new crop. Also, you must decide how far apart to space the plants. Will diminishing returns be a
factor in your decision making? If so, how will it affect your decisions?
The law of diminishing marginal returns says that, the more of a variable resource that is combined with
a given amount of a fixed resource (land in this case), marginal product (crop) will eventually decline.
Diminishing returns will result from growing crops too close together or planting too many times in one
year. Placing crops too close together deprives them of sufficient nutrients to grow. More plants grow,
but each produces smaller and fewer fruits or vegetables. If crops are not rotated and sufficient time is
not allowed for the soil to regain its nutrients, subsequent harvests will be smaller. For this reason,
farmers often allow a field to go fallow, planting it with grass or nitrogen-rich plants.
7. (Marginal Cost) What is the difference between fixed cost and variable cost? Does each type of cost
affect short-run marginal cost? If yes, explain how each affects marginal cost. If no, explain why each
does or does not affect marginal cost.
Fixed cost is a short-run phenomenon. It does not vary as output varies, and the firm must pay fixed costs
in the short run even if output is zero. Variable cost is associated with the firm’s variable resources. As
output varies, usage of the variable resources varies. Thus, variable cost rises as output rises and falls as
output falls. If output is zero, variable cost is zero. Because marginal cost measures the change in total
cost as output changes by one unit, it is affected by variable cost only. By definition, fixed cost does not
change in the short run and thus has no impact on short-run marginal cost.
8. (Marginal Cost) Explain why the marginal cost of production must increase if the marginal product of
the variable resource is decreasing.
A decrease in the marginal productivity of a variable resource means that the additional output from
each additional unit of the variable resource is getting smaller. Because each additional unit of the
variable resource adds the same amount to the total cost of production (i.e., this added cost equals the
unit price of the variable resource), the marginal cost of each additional unit of output must be
increasing.
9. (Costs in the Short Run) What effect would each of the following have on a firm’s short-run marginal
cost curve and its total fixed cost curve?
a. An increase in the wage rate
b. A decrease in property taxes
c. A rise in the purchase price of new capital
d. A rise in energy prices
a. This shifts the marginal cost curve upward and to the left. It would have no effect on fixed cost.
b. This shifts the fixed cost curve downward but has no effect on marginal cost.
c. This shifts the fixed cost curve upward but has no effect on marginal cost.
d. This shifts the marginal cost curve upward. It would have no effect on fixed cost.
10. (Costs in the Short Run) Identify each of the curves in the following graph:
A = average variable cost; B = average total cost; C = marginal cost.
11. (Marginal Cost and Average Cost) Explain why the marginal cost curve must intersect the average total
cost curve and the average variable cost curve at their minimum points. Why do the average total cost
and average variable cost curves get closer to one another as output increases?
When the marginal cost is below the average cost, the marginal pulls the average down, and the average
cost is decreasing. When the marginal cost is above the average cost, the marginal pulls the average up,
and the average cost is increasing. It follows that the marginal cost equals the average cost when the
average is at its minimum. Average total cost (ATC) and average variable cost (AVC) differ only by
average fixed cost (AFC), which is the fixed cost divided by quantity. As quantity increases, fixed cost
divided by quantity must fall, and ATC and AVC approach each other.
12. (Marginal Cost and Average Cost) In Exhibit 7 in this chapter, the output level where average total cost
is at a minimum is greater than the output level where average variable cost is at a minimum. Why?
As output increases, the average fixed cost (AFC) must fall. Therefore average total cost (ATC) is pulled
down by the AFC falling, with the increase in Q, because ATC = AVC + AFC. After AVC begins to
increase, ATC will still fall to the extent that AFC falls faster than AVC rises. Eventually AVC rises
faster than AFC falls, leading to an increase in ATC, but at a quantity larger than that associated with
minimum AVC.
13. (Long-Run Average Cost Curve) What types of changes could shift the long-run average cost curve?
How would these changes also affect the short-run average total cost curve?
The long-run average cost curve is determined by the technology of production and by resource prices.
For example, if there is a change in technology that increases the degree of returns to scale to the firm,
the long-run average cost curve shifts downward. Similarly, if the entry of firms into an industry causes
resource prices to rise, the long-run average cost curve shifts upward. In the first case, some of the
short-run average total cost curves shift downward (because of increasing returns to scale). In the
second case, all short-run average total cost curves shift upward.
14. (Long-Run Average Cost Curve) Explain the shape of the long-run average cost curve. What does
“minimum efficient scale” mean?
The shape of the long-run average cost curve is related to economies and diseconomies of scale.
Economies of scale are factors that cause long-run average cost to fall as output expands. Diseconomies
of scale are factors that cause long-run average cost to rise as output expands. The minimum efficient
scale is the lowest rate of output at which long-run average cost is at a minimum. Constant long-run
average cost may occur at some plant sizes above the minimum efficient scale. Eventually, diseconomies
of scale become powerful enough to cause rising long-run average cost.
15. (CaseStudy: Scale Economies and Diseconomies at the Movies) Concession stands account for well over
half the profits at most theaters. Given this, what are the benefits of the staggered movie times allowed
by multiple screens?
A benefit of staggered movie times in a multiple-screen operation is that the concession stand can
operate for longer periods of time than it could when only one feature film was shown.
16. (Scale Economies and Diseconomies) In analyzing scale economies and diseconomies, what's the
difference between the plant level and the firm level?
The plant level is a single location or business, but the firm level is a group of plants or businesses. For
example, one movie theatre versus a chain of movie theatres illustrates the plant versus firm levels.
Large firms do whatever possible to reduce diseconomies of scale.
ANSWERS TO PROBLEMS AND EXERCISES

17. (Production in the Short Run) Complete the following table. At what point does diminishing marginal
returns set in?
Units of the
Variable Resource Total Product Marginal Product
0 0 —
1 10 —
2 22 —
3 — 9
4 — 4
5 34 —
Units of the
Variable Resource Total Product Marginal Product
0 0 —
1 10 10
2 22 12
3 31 9
4 35 4
5 34 –1
The law of diminishing returns states that, as units of a variable resource are added to fixed
quantities of other resources, the resulting increases in total output eventually become smaller and
smaller. Diminishing marginal returns occur after the second unit of the variable resource is
employed.
18. (Total Cost and Marginal Cost) Complete the following table, assuming that each unit of labor costs $75
per day.
Quantity
of Labor Output Fixed Variable Total Marginal
per Day per Day Cost Cost Cost Cost
0 $___ $300 $____ $____ $___
1 5 ___ 75 ___ 15
2 11 ___ 150 450 12.50
3 15 ___ ___ 525 ___
4 18 ___ 300 600 25
5 20 ___ ___ ___ 37.50
a. Graph the fixed cost, variable cost, and total cost curves for these data.
b. What is the marginal product of the third unit of labor?
c. What is average total cost when output is 18 units per day?
Quantity
of Labor Output Fixed Variable Total Marginal
per Day per Day Cost Cost Cost Cost
0 0 $300 $0 $300 —
1 5 300 75 375 15
2 11 300 150 450 12.50
3 15 300 225 525 18.75
4 18 300 300 600 25
5 20 300 375 675 37.50
a.
b. The marginal product is 4.

c. The average total cost is $33.33.
19. (Total Cost and Marginal Cost) Complete the following table, where L is units of labor, Q is the rate of
output, and MP is the marginal product of labor.
L Q MP VC TC MC ATC
0 0 ____ $ 0 $120 $__ $__
1 6 ____ 30 150 ___ ___
2 15 ____ 60 ___ ___ ___
3 21 ____ 90 ___ ___ ___
4 24 ____ 120 ___ ___ ___
5 26 ____ 150 ___ ___ ___
a. At what quantity of labor input do the marginal returns from labor begin to diminish?
b. What is the average variable cost when Q = 24?
c. What is this firm’s fixed cost?
d. What is the wage rate per day?
This question demonstrates the relationships between marginal product and marginal costs as well as
between marginal and average total costs. The student should supply the missing numbers for MP, TC,
MC, and ATC as shown in italics in the following table:
L Q MP VC TC MC ATC
0 0 — $ 0 $120 — —
1 6 6 30 150 $5.00 $25.00
2 15 9 60 180 3.33 12.00
3 21 6 90 210 5.00 12.00
4 24 3 120 240 10.00 10.00
5 26 2 150 270 15.00 10.38
a. Diminishing MP occurs with the third unit of labor.

b. When output is 24, total variable cost is $120. Thus, average variable cost is $5.00.
c. Because total cost is $120 when output is zero, fixed cost must be $120.
d. Each unit of labor increases VC by $30, and therefore the wage rate is $30.
20. (Relationship Between Marginal Cost and Average Cost) Assume that labor and capital are the only
inputs used by a firm. Capital is fixed at 5 units, which cost $100 each per day. Each worker can be hired
for $200 each per day. Complete the following table to show average variable cost (AVC), average total
cost (ATC), and marginal cost (MC).
Quantity of
Labor Total Output AVC ATC MC
0 0 $___ $___ $___
1 100 ____ ____ ____
2 250 ____ ____ ____
3 350 ____ ____ ____
4 400 ____ ____ ____
5 425 ____ ____ ____
Quantity of
Labor Total Output AVC (VC/Q) ATC(TC/Q) MC(∆TC/∆Q)
0 0 — — —
1 100 $2.00 $7.00 $2.00
2 250 1.60 3.60 1.33
3 350 1.70 3.14 2.00
4 400 2.00 3.25 4.00
5 425 1.18 3.53 8.00
Students must calculate variable cost, which is $200 per worker, and fixed cost, which is given as 5
units at a cost of $100 each.
21. (Long-Run Costs) Suppose the firm has only three possible scales of production as shown below:
a. Which scale of production is most efficient when Q = 65?

b. Which scale of production is most efficient when Q = 75?
c. Trace out the long-run average cost curve on the diagram.
a. ATC2
b. ATC2
c. The long-run average cost curve (the thicker curve) shows the lowest cost for each output level (i.e.,
it coincides with ATC1 up to 40 units, with ATC2 from 40 to 120 units, and with ATC3 for output
above 120 units).
ANSWERS TO APPENDIX QUESTIONS

1. (Choice of Input Combination) Suppose that a firm’s cost per unit of labor is $100 per day and its cost
per unit of capital is $400 per day.
a. Draw the isocost line for a total cost per day of $2,000. Label the axes.
b. If this firm is producing efficiently, what is the marginal rate of technical substitution between labor
and capital?
c. Demonstrate your answer to part (b) using isocost lines and isoquant curves
a.
b. The MRTS is the slope of an isoquant. In equilibrium, it equals the slope of the isocost line, which in
this example is –1/4.
c.
In this diagram, all other points on isoquant Q involves a higher isocost. Isoquant Q is tangent to the
cost line at point e. Thus, its slope matches the slope of the isocost line. That is, the marginal rate of
technical substitution is –1/4, and this is the maximum output possible at a cost of $2,000.
2. (The Expansion Path) How are the expansion path and the long-run average cost curve related?
The expansion path indicates the lowest long-run total cost for each level of output. The long-run
average cost curve indicates the lowest long-run average cost for each level of output. Thus, both
devices indicate how the firm’s costs vary with long-run changes in plant size, given resource prices
and the level of technology.
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nature to be disposed to rebound from one extreme to
another. Truth lies more generally in the fair road between,
—though it does sometimes include a measure of one or
both extremes."
Thyrza looked up, and said, "I suppose any one living
here would describe the mountain as stern and frowning.
And we at Beckdale would describe it as all soft beauty,—
except just at The Scaur. And both would be true."
"Yes," I said; "but no man would have a fair conception

of the mountain as a whole, unless he had gained at least a
glimpse of both sides,—not to speak of other sides also
which we have not seen yet."
Then we rose and continued our walk. Thyrza seemed

thoughtful still. She observed, after a while, as if carrying
on our talk—
"Don't you think that sometimes people seem to see

only one side of—" she hesitated, lowering her voice
reverently,—"of Christ? I mean, even those who do really
love and obey Him?"
"My dear, ninety-nine hundredths of the errors into

which most of us fall, spring from one-sided views of Him,"
I said. "For He is THE TRUTH. One-sided views of Him are
one-sided views of Truth: and a one-sided view is always a
defective view."
"And isn't there any help—any cure?" she asked.
"Only in Him. He gives us clearer eyesight, and then He

shows Himself more clearly,—if we are willing," I said. "But
a great many people are so well content with what they
already see, as really to care little for seeing farther."
"Sir Keith often says that very much depends on our

willingness," Thyrza observed gravely.
I could not but remember the first time I had seen Sir
Keith. He had put the thought into my head.
We went on to the end of the Pass, the last part of our

way being a sharp descent, till we reached the pretty river
which begins as a streamlet on the central ridge or highest
point of the Pass. There for a while we rested, and there, to
Thyrza's joy, she discovered a fine plant of Parsley fern,
growing half under a sheltering rock. My "find" of last
summer died long ago, as Thyrza then predicted. "But I
shall keep this for my own," she said.
Plenty of time remained yet, when we had passed the

central ridge on our return. Thyrza seemed in no hurry to
reach home. She was in high spirits, no longer disposed to
sit still and meditate. She had repeatedly expressed a wish
to climb the steep hillside lying now to our left: and as we
advanced, the desire came over her more strongly.
"I really do think I must," she said at length. "It is quite

too tempting. And I am as fresh as a lark still. You shall just
sit here, and wait for me."
"Why should I not go too?" I asked.

"Oh, because you are not so robust as I am: and there
is always the chance of your hurting your knee again. No:
you must sit perfectly still, and be lazy. I know you enjoy
being alone in such a place as this. I dare say I shall not be
long. When I come down, we'll finish off the cake, before
going on."
CHAPTER XXXV.
ENTIRELY VANISHED!
THE SAME—continued.
I WATCHED Thyrza, as she crossed actively the broken

but on the whole level space, between the road and the
steep mountain-sides: and I saw her begin to climb with
easy speed.
It was a temptation to me to join her, even then. I am a

good climber by nature: and an ascent has always a
fascination for me. But I knew that without any such
additional exertion, I should have taxed my powers pretty
severely by the time we reached home. So I followed
Thyrza's advice, and remained quiet, seated on a rock by
the roadside, with my face toward the flowing green slopes.
The deep stillness of the scene impressed me again,

more forcibly than ever. For now I had not a companion. I
was entirely alone. Not even the trickling of water was to be
heard. One solitary dream-like "ba-a-a" sounded, to be
answered by a second. Then silence again. No human being
was in sight, except the figure of Thyrza, growing
momentarily smaller, as she went upward.
Her ascent seemed very slow, as I gazed. I began to

realise how much steeper and loftier those heights were
than we two had imagined.
But Thyrza went on, sometimes pausing, sometimes

turning to right or left, as if choosing her steps. At present
she showed no inclination to come back.
I observed her movements steadily, wondering how

much farther she would go. Her last words had been
—"Perhaps I shall have had enough of it half-way up." She
appeared now to be more than half-way up, but there were
no signs that she had had enough of it. Hardly probable
that she should. If the enthusiasm of climbing had
possession of her, she would scarcely rest content short of
the summit.
The little black figure still rose,—more and more like a

big ant clinging to the wall of a house; or I thought so.
All at once she came to a pause. I judged that she had

mounted somewhere about three-quarters of the height
from my level: but it is very difficult to judge truly, looking
upward. For some minutes she remained perfectly still. I
supposed her to be resting: yet it seemed a curious spot to
choose for a rest.
I was growing rather nervous at her prolonged fixity in

one position, when I distinctly saw her move. She seemed
to crawl a few paces to the right, and there to pause afresh.
At all events, she could start again, when she chose. That
set my mind at ease. It seemed likely that she saw the last
piece to be too much for her powers: and that after a brief
repose she would come down.
"Time enough too," I said aloud; and my voice sounded

strange in the solitude. "This takes longer than I calculated
on. We ought to be getting homeward."
Then, curiously, it flashed into my mind that I had an

unread letter with me. Why not wile away some minutes by
reading it, as I sat there?
I pulled out the black-edged envelope, which was a

good deal crumpled; and noticed the London postmark.
"Not Bath!" I said, with momentary surprise. And one look
at the agitated uneven handwriting showed me that it was
not Ellen Smyth's,—but—Miss Millington's! Strange that I
had not recognised it at first sight; only hers, as I had
known it previously, was neither agitated nor uneven, but
neat and precise to a fault.
Within were two sheets, blotted, blurred, and closely

filled.
Then that which I expected had come at last!—And I

knew it!
I am ashamed to say that I forgot all about Thyrza. I

think I even forgot where I was. Noises were sounding in
my ears, like the distant roar of a great city; and a dread of
what I might find in that letter had possession of me.
For I could see it to be some manner of outpouring; and

I could conjecture what the outpouring might include. I
quailed before the prospect. Suspicion was one thing;
certainty would be another. I believed that I had fully
forgiven Miss Millington. Would the battle have now to be
fought all over again?
With a voiceless prayer, and with a resolute effort, I

took up the sheets, not reading yet, but glancing rapidly at
a sentence here or there. When I reached the end thus, one
short assertion only remained on my mind—
"I was not really sure."
I must have sunk into a dream upon those five words,

and their possible meaning. Then I woke up to the fact that
the letter contained much besides, especially the sad news
of Mrs. Millington's death.
I began again at the beginning, and read the whole

through carefully. It was a sorrowful composition,—bitter,
self-reproachful, miserable in tone. I cannot copy the whole,
and I will not keep the original. A few sentences will be
enough.
"I don't know what kept me from speaking,

that day," she wrote. "For I did really want to
tell you I was sorry; only I could not. I suppose
it was pride. I know I am proud. I did so hate to
take the money; and yet somehow I could not
say no, for I thought it might save my Mother's
life. And it has not. That is the worst of all. I
have gone through that horrible humiliation for
nothing. Mother did seem better for a time, and
of course it was a real comfort to her to be out
of debt, but she failed at last quite suddenly,
and nothing more could be done.
"It was only yesterday that she died.

"I am writing to you now, because I must. I
dare not put off. I have such a dreadful feeling
that perhaps, if I had spoken out sooner, God
would not have taken my Mother. I dare say
some people would say I am foolish to think
this, but I know better. All these months I have
known I ought to speak, and I have been
struggling against it; and now she is gone, and
I have nobody left except Jeannie. And perhaps
if I do not speak out, she will be taken too. I
don't think I could bear that. She looks ill, and
it terrifies me. I dare say I deserve that, or
anything,—but at all events, I am telling you
the truth now. I wish I had before . . .
"You told me you had forgiven me: but I

never could feel that was real, because if you
had known all, you would not have said so . . .
"I don't know what made me hate you as I

did! I suppose it was partly your being Mrs.
Romilly's friend. And I always thought you could
not endure me: and when you seemed kind, I
felt sure you had an object. I can't make up my
mind how much you really know of things, or
how much I ought to tell you—" and then
followed melancholy particulars, written as it
seemed to me in a half-broken half-bitter spirit,
more because she dreaded not to tell from a
haunting fear of punishment, than because her
will was bowed to do God's will.
No need to copy out these details. Only—I have not

judged her falsely.
For the Gurglepool trick was hers: and she did set
herself to oppose my authority in every possible way. She
endeavoured systematically to turn the girls against me.
She used the opportunity to look into my private journal,
and she employed afterwards the information so gained,
making it a subject of jesting with the girls, and untruthfully
professing to have learnt it through a friend of hers who
lives in Bath.
Worse even than all this,—not morally worse, for that

could hardly be, but worse in its actual results upon my
happiness,—when Arthur came to Beckdale, to learn if he
had any hope of winning me; which she seems to have
divined as his object; she set herself deliberately, falsely, to
quash his hopes. In a certain brief interview, she gave him
to understand, not by assertion, but by insinuation no whit
less untrue, that I had shown a marked dislike to him.
More still,—when she received her dismissal from Mrs.

Romilly, she took a further step. She sent a brief note to
Arthur to reach him at The Park, briefly warning him as a
friend—a friend!!—that if he wished to consult his own
interests and peace of mind, he would keep out of my way.
"I don't know what he thought of me. I think

I must have been mad,—such a wild thing to
do," she wrote. "He never answered my note or
took any notice of it. But it took effect: and that
was all I cared for. I had my revenge,—and I
wanted nothing else.
"It is of no use to ask if you can possibly ever

forget all this; for I know you can't. I could not
in your place. I will never never be untruthful
again,—but that can't alter what I have done to
you. It is impossible that you should get over
it."
And at the moment my heart cried out assent to the

impossibility.
For he had come indeed to seek me once: and a second

time we might have met; and twice she had driven him
away.
Then at length I reached the mention of her more

recent letter to Maggie, in which was contained the news of
his engagement.
"I was so glad to have it to tell," she wrote,

"that I would not ask any particulars,—I
wouldn't even try to find out if it was true. I
was not really sure. It was just told as a piece
of gossip, and I knew there might be some
mistake. I was not really sure. But I wrote to
Maggie directly, and I have never heard any
more. I do not even know where Captain Lenox
is now. I think I should have heard if it were not
true, and I am afraid it is. So I can do nothing
at all to undo the past: and that makes me sure
that I must not expect you ever to be friends
with me again. Only for the sake of Jeannie,
and because of my feeling that she will die, if I
do not—I must tell you all."
I had not noticed before those words following the

others,—fearing it was, after all, true.
It did seem to me too much—too great a wrong! I must
have sat long, half unconscious of my own position, clasping
the letter tightly between both hands. For a while I could
not think,—I could only feel. The knowledge that a year ago
he had still cared, touched me very keenly, with a mingling,
of sweet and bitter. But the "might have been," and the
"was not,"—and the sense of the great life-loss, the
loneliness, the sadness to come,—all through her! How
could I forgive?
The stony hardness broke up at last, and tears fell in a

shower. I have not wept so freely for years, I think. And
when that came to an end, the bitterness seemed gone. I
could once more say,—"His will—not mine."
* * * * * * *
But Thyrza!
It came over me in a flash, vivid as lightning, how long

I had been there. Thyrza ought by this time, surely, to have
reached the lower slopes.
I looked up, running my eyes swiftly over the broad

mountain face, searching from below to above, from right to
left. In vain. No Thyrza was to be seen. I scanned the
frowning beauty of the level summit, and travelled
downward again to the spot where I had noted her last. But
Thyrza had vanished.
CHAPTER XXXVI.
AND HE—!
THE SAME—continued.
I HAD not looked at my watch when Thyrza left me. A

glance at it now showed the afternoon to be far advanced;
indeed, this I already knew from the slant of the sun's rays.
Blaming myself much for the absorption in my own

affairs, to which I had weakly yielded, I stood up and again
eagerly scanned the green slopes; without result.
Had Thyrza reached the top, and there been taken ill
from over-exertion? Such a thing might happen. Or had she
lost her footing, and rolled downward?
If the latter, I should find her without difficulty lying

below, hidden from where I stood, but not far off. The very
idea brought a cold shiver. That I disregarded, however.
Action of some kind was necessary. Feeling had to wait.
It was not, of course, impossible that Thyrza should

have reached the summit, tempted onward by the
excitement of climbing, and there should have vanished for
a short time before descending. But the fact which startled
me was the length of the time she had been absent. A brief
disappearance would not have been surprising. I could not
understand her remaining away. Thyrza is so thoughtful;
unlike Maggie and Nona; and especially thoughtful about
me. I had said to her laughingly before she went, "Mind, if
anything goes wrong, I shall come after you." She would
remember this; and I knew she did not wish me to attempt
the ascent.
The search below was soon over. I explored every spot
where she might lie hidden, had she slipped and fallen. She
was not there; neither was she on the slopes. I could see
the broad green expanse, as I stood beneath looking
upwards,—in parts frightfully near the perpendicular. I
began to think I had done foolishly in consenting to let her
go up.
If she did not very soon appear, nothing remained for

me but to follow in her wake. I determined to wait a quarter
of an hour; then, if she had not appeared, to start without
more delay.
The fifteen minutes dragged past slowly. I had made my

way to a low wall, and there I sat, waiting, watch in hand,
in the soundless solitude. Nobody passed along the road. No
human being was visible on the heights. It seemed to me
that they grew steeper and loftier the longer I gazed.
"Time up! I must go!" I said aloud.
I suppose I moved too hastily, stepping down from my

seat on the wall. I had gone there for a clear view. The wall
was formed of large jagged stones, piled loosely together.
One of these stones gave way under my foot, and I came to
the ground with a sharp jar,—standing, but a good deal
shaken,—and when I took a step away from the spot, I was
instantly conscious of a crick in my weaker knee,—it might
be a strain or twist.
For a minute I kept perfectly still, hoping that it would

prove to be nothing. But the first movement showed me
conclusively that my climb was at an end. I might as well
have tried to reach the moon as the summit of the
mountain.
It was a severe disappointment. If Thyrza had hurt
herself, and were ill or disabled above, she would be
needing me sorely.
Still, it was out of the question that I should go: and the
thought now occurred that I ought at once to return to my
seat on the road. If the dog-cart came to meet us, as it
might do later, I had no business to be out of its direct path.
Besides, Thyrza would know where to find me, or to send a
messenger, if she had found it needful to go round some
other way, rather than attempt the descent.
So very cautiously, and not without a good deal of pain

in the knee, I limped back to my old position.
The hour following seemed very long, very dreary. I do

not know that I have ever felt more weighed down and
altogether sorrowful. I was anxious about Thyrza: and my
own future seemed so grey and wearisome. The letter from
Miss Millington pressed upon me like lead. Could I in heart
and soul forgive her the wrong she had wilfully done to me?
At the end of an hour, or something like an hour, I

looked up,—I had been gazing on the ground,—and the
sunbeams were shining like reddish gold all along the broad
mountain brow, with wonderful beauty. It seemed to me the
gleam of a smile from heaven. The mountain's frown was
lost in that smile.
"I shall find brightness enough in another world, if not

in this," I found myself saying aloud. "One only has to wait
a little while."
The deadly stillness of the Pass was so strange: no

answer coming. And then a soft voice seemed to say, "Miss
Millington?"—as if asking a question.
"Yes!" I said; and there was a sudden radiance of joy in
my heart, resembling the outside glow. "Yes, I do forgive! I
will write and tell her so."
The shining radiance deepened, without and within. I

had an extraordinary sense of rest,—of willingness to
receive whatever might be sent me. No thought of fear
mingled with the willingness, though I whispered
instinctively, "Does this mean some fresh great trouble?" If
it did, I was willing still. The Presence of my Master would
make all things light.
I almost expected another utterance of the soft voice,

speaking to my heart from without or within—which, I do
not know. I waited—listening.
And no voice spoke. But my eyes fell upon a figure,

descending the great green slope, exactly in front.
"Thyrza!" I cried.
It was not Thyrza. It was a man. I saw him distinctly in

the full sunlight. Had he come to tell me ill news of Thyrza?
I cannot think now why I was not more afraid. I did not
feel afraid, sitting there with clasped hands, gazing upward.
I could follow every movement of the descending figure. He
seemed to be a good climber. That was speedily apparent.
Down and down he came, steadily. Once he leaped a wall,
perhaps to find an easier slope on the other side.
When more than half-way down, he stood still, and

seemed to be looking at something or for somebody. I
waved my handkerchief, and he at once waved his. So I
knew he was coming to me,—though I did not know yet the
full meaning of "he!" Joys, like sorrows, often dawn upon us
step by step.
The lower portion of the slope was very rapidly got
over; so rapidly that I was afraid he would slip. He took it at
a run, and I saw him spring over some obstacle at the
bottom. After which he marched straightly and swiftly
towards where I sat.
Till then no thought of the truth had come into my

mind. But something in the upright bearing, the slender
frame, the soldierly walk, brought recollections thronging
and made my heart beat fast.
"Absurd," I murmured. "Ridiculous of me to think—But

it is like! I suppose he must be in the army too, whoever he
is."
I do not know how long I fought against the reality,—

how soon I dared to let myself believe it. I only know that I
stood up slowly, and that he came nearer and nearer,—
came fast, with his face turned fixedly towards mine. And
the sunshine outside seemed to be filling my heart again;
only this time it was a more earthly tremulous sunshine,
flickering with every stride he took.
And I forgot all about Miss Millington, all about the news
of Arthur's engagement.
For he was standing close in front of me, his hand

clasping mine, and I was looking up into his face with a
smile of welcome, such as I had not dared to give him that
other time when we met. The lonely Pass seemed all at
once full of life; and every touch of greyness had gone out
of my future.
For the moment that our eyes met, I think each

understood the other; though I only said, "Where is
Thyrza?"
"Gone home with Sir Keith," he answered.
"Then you have seen her?" I asked.
"Yes," he said, and he explained briefly. Thyrza had

climbed two-thirds of the height; then, pausing to look
below, she had been seized with terror and giddiness, for
the first time in her life, and had very nearly fallen down the
mountain side. By dint of remaining still, and looking
resolutely upward, she had so far recovered herself as to
continue the ascent, reaching the top with great difficulty.
To descend again, however, had proved out of the

question. Every time she approached the edge, dizziness
and dread overpowered her anew. She had waved her
handkerchief and made various signs to me, hoping that I
should understand. Being short-sighted, she could not know
whether I responded, which of course I did not, as I was
then wrapped up in my letter.
Thereafter Thyrza had started off to find another way

round. Her first intention was to go to The Scaur, and to
descend the narrow path which runs down beside the bare
rock: but happily she hit upon a shorter cut to the road by
which we had approached the Pass.
Thyrza knew that Sir Keith had gone to Beckbergh to

meet Arthur: and she knew that the two might possibly
drive to meet us, if our return were at all delayed. I believe
she had rather liked the prospect, and had been not
indisposed to bring it about by delay: though later, when
hurrying alone down the hills, she little expected to be so
fortunate as to meet them at the moment she reached the
road.
However, this really occurred. They pulled up and

sprang down, astonished to see her alone. Thyrza must
have been a good deal shaken by her touch of "vertigo," for
she burst into tears when trying to explain matters,—a
most astonishing event. Thyrza never cries in public, under
any consideration, as a rule. Sir Keith was much troubled,
and very sympathising; and Arthur promptly proposed to go
in search of me, while Sir Keith drove Thyrza home.
Thyrza at first resisted, but she had to yield to Sir

Keith's determination. The general impression was that I
should certainly endeavour to climb the height in search of
Thyrza, when she failed to return,—a well-founded theory,
as proved by circumstances. Arthur resolved, therefore, to
go by the same way that Thyrza had come. He had already
explored these mountains, when staying last year at the
Farm: besides, he is one of those men who are never at a
loss in the wildest country.
So Sir Keith drove off with Thyrza, promising to bring or

send the dog-cart with all speed to meet Arthur and me:
and he made good use of his opportunity, following the
advice I had given.
Arthur meanwhile found his way with all speed to the

brow of the mountain, walking along it till he saw a little
figure seated far below in the road. And as he came down,
he stopped now and again to wave his handkerchief. Twice
in vain: the third time I saw him, and waved mine.
Some of this Arthur told me briefly; much more I have

heard since.
Then, to his concern, he learnt that I had hurt my knee:

and he said how foolish he had been to let the dog-cart go
home first, instead of driving straight to the Pass. And I said
—"Oh no,—I am so glad you did!" For how could I wish
anything to be different? How could I mind waiting?
Then he said something, speaking a little brokenly,
about having almost made up his mind to leave England for
ever. He had thought of it for months. And he had been to
Glynde again for a night,—he hardly knew why. He had seen
Mrs. Hepburn and Gladys. And something—something
Gladys said or did not say,—something in her look of
reproach, when she spoke of me,—had made him resolve to
try once more.
And in a husky altered voice, he asked—
"Constance, is it true?—Have I been under a great

mistake? Could you be mine now,—after all?"
I have no idea what I said in answer. It matters little

what words one uses at such a moment, or whether one
uses any words at all. He understood me, and I understood
him. It was such wonderful unexpected happiness. All
clouds seemed to have been suddenly swept away from my
whole horizon, leaving only sunshine and a blue sky.
But I think my first impulse was to look up,—to feel that

this joy was indeed my Father's gift to me, and to Arthur.
Life was so changed to both of us, in that one short

hour. Changed, and yet the same. For the same Presence is
with us still, the same Will directing us, the same Love
surrounding us, the same Light beckoning us onward.
Only now we hope to live a life of service to Christ

together,—not apart. And that means earthly as well as
Heavenly sunshine.
When we reached home, we found that Sir Keith and

Thyrza were engaged, to the great satisfaction of
everybody. Thyrza appeared to have quite recovered from
her severe climb. And I wrote at once a few lines of comfort
to Miss Millington, telling her of my new happiness, and of
the Help which might be hers, if only she herself were
willing.
GLADYS HEPBURN'S DIARY.
July 27. Tuesday.—Good news! Good news!
I was dreadfully afraid last week that I might have

blundered. It is so fearfully difficult to know always what is
just the wisest thing to say and do.
Major Lenox made his appearance suddenly. He was

spending a night at the Inn, and he asked if he might come
in to afternoon tea. And when he was here, instead of
keeping off from the subject of Miss Con, he seemed to do
nothing but bring her name up.
Well,—I really thought I ought to say something. I could

not ask Mother's advice; because, of course, I have never
felt free to tell her or any one about Miss Con's distress that
day. It would be a betrayal of confidence.
An opportunity came up in the garden, when nobody

was near for a minute or two. He said something about
Yorkshire, and I spoke of the Romillys; and he answered
me; and I asked him if he knew Miss Millington. He said
"Hardly," in a considering tone; and I said, "Oh, she wrote
us word of your engagement."
I was afraid he would think me blunt and interfering,

but I really did it only for dear Miss Con's sake. He turned
sharp round, and said, "How could she have heard that
ridiculous tale?"
I believe I said, "Was it a tale?"
"Certainly," he said. "No foundation whatever!" And he

looked quite fierce, and tugged at his moustaches.
And I said—not knowing what meant to come next—
"One never can depend on anything from Miss

Millington. She told Maggie—and Maggie told me—and Miss
Conway."
"Miss Conway heard it?" Major Lenox asked.
I said, "Yes!" and I looked straight at him for a moment.

I did not dare to say any more, but I know what I wanted to
say. And somehow it almost seemed to me that he read my
thoughts. Such a curious softened expression came into his
eyes: and his manner was different after that moment.
Nothing more was said by either of us: only next

morning he walked in to say good-bye, and in a casual sort
of way he spoke about "going north."
The very next thing we heard was that he had seen Miss
Con, and that they are engaged. And he has given up all
idea of exchanging into a regiment abroad. Oh it is so good!
Thyrza is engaged too,—actually on the same day, and

to Sir Keith, of all people.
Mother seems not at all surprised, but it is a great

surprise to me. I like Thyrza much better than I used:
because she is more affectionate and less stiff; but I should
not count her the kind of girl to be fallen in love with easily.

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C. The Total and Marginal Product Curves

III. Costs in the Short Run

A. Total Cost and Marginal Cost in the Short Run

B. Average Cost in the Short Run

Case Study: Scale Economies and Diseconomies at the Movies

D. Economies and Diseconomies of Scale at the Firm Level

Appendix: A Closer Look at Production and Cost

ANSWERS TO QUESTIONS FOR REVIEW

a) explicit; b) implicit; c) explicit; d) implicit

Accounting profit = total revenue – explicit costs

A = average variable cost; B = average total cost; C = marginal cost.

ANSWERS TO PROBLEMS AND EXERCISES

b. The marginal product is 4.

a. Diminishing MP occurs with the third unit of labor.

a. Which scale of production is most efficient when Q = 65?

ANSWERS TO APPENDIX QUESTIONS

"Don't go to the opposite extreme, my dear, of thinking

She laughed, and asked, "Am I in danger of that?"

"Not at present, I think. But it is a weakness of human

"Yes," I said; "but no man would have a fair conception

Then we rose and continued our walk. Thyrza seemed

"Don't you think that sometimes people seem to see

"My dear, ninety-nine hundredths of the errors into

"And isn't there any help—any cure?" she asked.

"Only in Him. He gives us clearer eyesight, and then He

"Sir Keith often says that very much depends on our

We went on to the end of the Pass, the last part of our

Plenty of time remained yet, when we had passed the

"I really do think I must," she said at length. "It is quite

"Why should I not go too?" I asked.

I WATCHED Thyrza, as she crossed actively the broken

It was a temptation to me to join her, even then. I am a

The deep stillness of the scene impressed me again,

Her ascent seemed very slow, as I gazed. I began to

But Thyrza went on, sometimes pausing, sometimes

I observed her movements steadily, wondering how

The little black figure still rose,—more and more like a

All at once she came to a pause. I judged that she had

I was growing rather nervous at her prolonged fixity in

"Time enough too," I said aloud; and my voice sounded

Then, curiously, it flashed into my mind that I had an

I pulled out the black-edged envelope, which was a

Within were two sheets, blotted, blurred, and closely

Then that which I expected had come at last!—And I

I am ashamed to say that I forgot all about Thyrza. I

For I could see it to be some manner of outpouring; and

With a voiceless prayer, and with a resolute effort, I

"I was not really sure."