Professional Documents
Culture Documents
Download Microeconomics Canadian 14th Edition Ragan Solutions Manual all chapters
Download Microeconomics Canadian 14th Edition Ragan Solutions Manual all chapters
https://testbankfan.com/product/microeconomics-canadian-14th-
edition-ragan-test-bank/
https://testbankfan.com/product/microeconomics-canadian-15th-
edition-ragan-solutions-manual/
https://testbankfan.com/product/macroeconomics-fourteenth-
canadian-edition-canadian-14th-edition-ragan-solutions-manual/
https://testbankfan.com/product/microeconomics-canadian-13th-
edition-ragan-test-bank/
Microeconomics Canadian 15th Edition Ragan Test Bank
https://testbankfan.com/product/microeconomics-canadian-15th-
edition-ragan-test-bank/
https://testbankfan.com/product/microeconomics-canadian-14th-
edition-mcconnell-solutions-manual/
https://testbankfan.com/product/macroeconomics-fourteenth-
canadian-edition-canadian-14th-edition-ragan-test-bank/
https://testbankfan.com/product/economics-fourteenth-canadian-
edition-canadian-14th-edition-ragan-test-bank/
https://testbankfan.com/product/macroeconomics-canadian-15th-
edition-ragan-solutions-manual/
68 Chapter 7: Producers in the Short Run
_____________________________________
Students are often puzzled by the question: “Just how many factors of production can firms vary
when they are producing?” It is important for them to realize that the answer depends on the
context. To understand the principle of substitution, it is necessary to have two variable factors of
production, and it may be distracting to deal with more. Thus, Classical economists seeking to
illustrate this point used “land” and “labour”. As soon as they wished to distinguish man-made
factors from natural ones, they added “capital”. For other types of applications, it is necessary to
distinguish many kinds of labour skills. We also distinguish between the basic factors of production
(land, labour, and capital) and those intermediate products that are produced by some firms and
used as inputs by others.
We have placed the discussion of economic and technical efficiency in Chapter 8 where it
naturally arises in the discussion of the firm’s long-run choices. Some instructors feel that
efficiency is too important to postpone. However, treating it earlier raises problems since students
should first be exposed to a precise discussion of production functions, firms’ opportunity costs,
and their short-run choices.
***
The chapter begins with a discussion of firms as agents of production. We discuss the various types
of firms, how they are organized, and also how they are financed. Our discussion of the goal of
profit maximization leads to a box on corporate social responsibility, a hot current topic that we
hope students will find thought provoking.
The second section examines profits and costs. Central to this discussion is the difference
between the accounting concepts of costs and profits and the corresponding economic concepts.
We also explain why understanding profit maximization requires us to understand both the cost
side and the demand side of the firm’s problem. This sets us up for the rest of the chapter dealing
with short-run costs. Finally, we briefly mention the great variety of firms’ decisions and their
summary classification as “short run”, “long run”, and “very long run”. It is worth emphasizing to
students that these are types of decisions, not real time periods that are the same for all kinds of
firms.
The chapter’s third section begins the formal analysis of firm behaviour. We introduce and
illustrate the relationship between total product, average product, and marginal product. Students
often seem baffled by the mathematical relationship between marginal and average, so we spend
some time on this. This leads to a box on some everyday examples of the concept of diminishing
returns, including an example of portfolio diversification. Discussion of the box makes for lively
class time and it is sometimes interesting to challenge students to find examples of diminishing
returns in news stories over the next week. When we do this, we usually find that discussion of why
some of the offered illustrations are not cases of diminishing returns provides more insight than the
discussion of correct illustrations.
The fourth and final section examines the whole family of short-run cost curves, which we
develop from a simple production function with fixed capital and fixed factor prices. The short-run
cost curves are developed in the conventional fashion. We plot the short-run cost curves using the
specific example of a production function developed earlier in the chapter. Students can review this
example closely and plot the curves for themselves to make sure they are comfortable with the
various relationships. An optional box discusses how cost curves can have flat portions when firms
have the ability to vary the amount of capital that they use. This is an important real-world
phenomenon in many industries, and is entirely consistent with the basic theory discussed in the
chapter, but we leave it in a box so that instructors can choose to omit it if they wish. This section
closes by examining how changes in factor prices and changes in the firm’s capital stock affect the
family of short-run cost curves. This provides a nice motivation and link to the next chapter on
firms’ long-run decisions.
***
A Caveat. This is one of the shorter chapters in the book, but its length is not indicative of
its importance. Students will likely view the production and cost relationships as rather dull stuff.
Since learning this material represents an investment for use later in the course, we suggest to our
students that this is an example of capitalistic production at work—we must invest in some
vocabulary and some analytic tools before discussing the much more interesting matters of pricing
and market structure in later chapters.
Question 1
a) production function
Question 2
c) above; below
Question 3
a) minimum
b) increase
c) capacity
Question 4
a) This is the typical business’s concept of accounting profits, which is a satisfactory or normal
return on the owner’s capital.
b) This is the economist’s concept of profits; only when there are positive economic profits will
business have the incentive to expand production.
c) This uses the accountant’s definition of profits. It may seem paradoxical to students that reducing
a firm’s accounting profits is “profitable” to its owners. However, if a company is allowed to write
off increased depreciation, this lowers its current (accounting) profits and postpones its tax
payments until the future year when the depreciation has all been taken. Since money currently in
the hands of the firm is valuable to it, this is an advantage to the firm.
d) This idea of “net cash flow” is probably most closely related to accounting profits. Note that any
fixed or capital costs that have been incurred in the past are absent from a measure of current cash
flow, so it is unlikely to be related to the concept of economic profits. Furthermore, any opportunity
costs that do not involve the explicit flow of cash are missed when discussing net cash flow.
Without knowledge of the full cost structure, however, it is difficult to be sure which profit concept
(accounting or economic) is being used here.
Question 5
a) The table is completed below. Note that for marginal product (MP), the computation is done
for the change in output and labour input between rows. Thus, the first value in the table for MP
reflects the change in output from 0 to 2 and the change in labour from 0 to 1; the marginal
product is therefore equal to ∆TP/∆L = 2/1 = 2.
5 18 3.6 4
6 21 3.5 3
7 23 3.3 2
8 24 3 1
Question 6
a) As shown in Table 7-1 in the chapter, accounting profits are equal to revenues minus explicit
costs, and do not include the opportunity cost of the owner’s financial capital. The total revenues
shown are $657 000. The total direct costs equal $542 000. Thus the accounting profit is the
difference between the two, $115 000.
b) The 16 percent rate of return on capital is an annual rate. If equally risky ventures in other
industries can generate a 16 percent annual return, then the opportunity cost on Mr. Buford’s
capital for one year is 0.16 × ($400 000) = $64 000.
c) Economic profits are equal to accounting profits minus the opportunity cost of the owner’s
financial capital. Thus economic profits for Spruce Décor in 2013 are $115 000 – $64 000 = $51
000.
d) If Spruce Décor is a typical firm in the industry then the typical firm is making positive
economic profits. Thus profits in this industry are higher than what is available in equally risky
ventures in other industries. Such positive economic profits will lead other firms to enter this
industry.
Question 7
Note that the opportunity cost of remaining in business is not only the $70 000 in explicit expenses
the carpenter incurs, but also the income from the furniture factory that the carpenter cannot receive
because he has made the decision to operate his own shop. If this forgone salary is any larger than
$30 000, then the carpenter should go back to the factory. Another way to say this is that his
(accounting) profits are $30 000 per year when he runs his own business. So if his salary at his first
job is higher than $30 000, he should go back to the factory.
Question 8
a) By substituting the values of K and L into the production function provided (Q = KL – .1L2),
the values for Q are easily found. The answers are:
K L Q = KL – .1L2
10 5 50 – .1(25) = 47.5
10 10 100 – .1(100) = 90
10 15 150 – .1(225) = 127.5
10 20 200 – .1(400) = 160
10 25 250 – .1(625) = 187.5
10 30 300 – .1(900) = 210
10 40 400 – .1(1600) = 240
10 50 500 – .1(2500) = 250
b) The following diagram shows the relationship between L and Q, for K fixed and equal to 10.
Note that the curve goes through the origin because when L equals 0, Q also equals 0
(independent of the value of K).
c) If K increases to K = 20, then the values of Q will also increase (for any given value of L). The
re-computed values for Q are in the table below. The new curve is shown in the diagram above,
indicated by K = 20.
K L Q = KL – .1L2
20 5 100 – .1(25) = 97.5
20 10 200 – .1(100) = 190
20 15 300 – .1(225) = 277.5
20 20 400 – .1(400) = 360
20 25 500 – .1(625) = 437.5
20 30 600 – .1(900) = 510
20 40 800 – .1(1600) = 640
20 50 1000 – .1(2500) = 750
d) A larger capital stock means that any given amount of labour now has more capital to work with,
and thus can produce more output. This increase in the average product of labour is reflected
simply by the upward shift in the curve shown above. Note also, however, that in this case (and in
many others), the increase in K also increases the marginal product of labour for any given level of
labour input. This is shown by the increase in the slope of the curve for any level of L. For example,
for L = 25, the slope of the K = 20 curve is greater than the slope of the K = 10 curve. This shows
that the increase in K has made labour more productive at the margin.
Question 9
a) The average product of labour is equal to total output divided by the number of units of labour
input. The values are shown in the table below and the AP curve is plotted in the figure below.
b) The marginal product of labour is equal to the change in total output divided by the change in
labour input that brought it about. In the table above, we compute the marginal product according to
the change in values from one row to the next, so the first row is left empty. The MP curve is
plotted in the figure above. Note that the values are plotted at the midpoints of the units of labour.
c) The law of diminishing marginal returns is satisfied for labour because (eventually) the
marginal product of labour falls as more and more labour is used.
d) As we explained in the text, the average product of labour can only rise if the marginal product
exceeds the average product. This relationship is seen clearly in the figure for levels of labour
input below 180. Similarly, the average product of labour only falls when the marginal product is
less than the average product, as seen in the figure for values of labour above 180. It follows that
the MP curve must intersect the AP curve at its maximum, as shown in the figure.
Question 10
a) Average fixed cost (AFC) is equal to total fixed cost (TFC) divided by the level of output. The
values for AFC are shown in the table below.
b) Average variable cost (AVC) is equal to total variable cost (TVC) divided by the level of output.
The values for AVC are shown in the table below.
c) Average total cost (ATC) is equal to total cost (TVC + TFC) divided by the level of output. The
values for ATC are shown in the table below. The firm’s “capacity” is the level of output at which
ATC is minimized, which in this case is 8 (thousand) bicycles per year.
d) The scale diagram is shown below. Note that the upper-most section of the AFC curve is not
shown.
Question 11
a) The relationships between output and the units of variable input can be described as follows:
i) Output increases proportionally with the variable input. That is, an x percent
increase in L leads to an x percent increase in total output.
ii) Output is positive even when there is no L. And for each unit change in L there is a
constant unit change in output.
iii) Up to some critical level of L, output increases proportionally with increases in L.
But beyond this critical level of L, further increases in L lead to no change in total
output.
iv) Output increases with every increase in L, but each successive unit increase in L
leads to smaller increases in total output.
b) The average product curves for the four cases are shown in the figure below. In the first case, the
AP is constant. In the second case, due to the positive vertical intercept of the TP curve, the AP
curve falls as L increases. In the third case, up to the critical level of L, L*, the AP is constant. But
beyond that point, since output does not increase but L does, the AP curve falls. In the fourth case,
the AP curve is steadily declining.
c) The marginal product curves are also shown in the diagram above. In the first case, the slope of
the TP curve is constant and so the MP curve is a horizontal line. In the second case, the MP is also
constant, even though AP declines steadily. In the third case, the MP is positive and constant up to
L*, after which point MP is zero. In the fourth case, MP steadily falls and is below AP.
Question 12
The graph showing the relationship between agricultural output and fertilizer use is as follows.
The average products, calculated as an average over the fifteen-unit intervals, are shown below. We
have calculated the marginal products over the same intervals, but note that the MP applies for the
change from one row to the next.
Average product falls throughout, so diminishing average product sets in at a very low, perhaps
even zero, dose. Marginal product rises for the first few intervals and then declines roughly steadily,
so diminishing marginal product sets in somewhere between thirty and sixty doses.
*****
Title: The tryal of Mr. Daniel Sutton, for the high crime of preserving
the lives of His Majesty's liege subjects, by means of
inoculation
Language: English
TRYAL
OF
FOR THE
HIGH CRIME
OF
OF
His Majesty’s liege Subjects,
BY MEANS OF
INOCULATION.
THE SECOND EDITION.
LONDON:
Printed for S. Bladon, at Nᵒ. 28. Pater-noster-Row.
M.DCC.LXVII.
THE
TRYAL
OF
This day Daniel Sutton was brought to the bar of the Court upon a
Habeas Corpus, in order to be arraigned on an indictment for
preserving the lives of the King’s subjects, found by the grand jury
for the county of Essex.
Counsel for the Cr. Mr. President, there is an indictment for high
crimes, and misdemeanors, found against Mr. Daniel Sutton, which
hath been removed into this Court by certiorari; the certiorari and
return thereof hath been filed, and the Prisoner is now brought into
Court in order to be arraigned.
President. Read the indictment.
Cl. of the Cr. Daniel Sutton, hold up your hand. You stand indicted
by the name of Daniel Sutton, late of the town of Ingatestone, in the
county of Essex, for that you by inoculating, and causing to be
inoculated, and by means of certain secret medicines and modes of
practice, unknown to this College and to all other practitioners, not
having the fear of the College in your heart, do presume to preserve
the lives of his Majesty’s liege subjects; and that more especially
during the three years last past, you have inoculated, or caused to
be inoculated, twenty thousand persons, without the loss of one
single patient by inoculation, contrary to the statute in that case
made and provided.
Then the twelve jurors were sworn and counted.
Cl. of the Cr. Cryer, make proclamation.
Cryer. O yes! If any one can inform, &c.
Cl. of the Cr. Daniel Sutton, hold up your hand. Gentlemen of the
jury, look upon the prisoner and hearken to his cause.
Couns. for the Cr. Mr. President, and gentlemen of the jury, this
indictment is for the high crime of preserving the lives of his
Majesty’s subjects by means of inoculation, and particularly by
modes of practice and the exhibition of certain medicines unknown
to this College, and to all others who practise the art of healing.
Gentlemen, with regard to the first part of this charge, namely, that
of preserving the lives of the King’s liege subjects, we shall prove,
beyond all possibility of doubt, that in twenty thousand, whom the
Prisoner hath inoculated, not one single patient hath died, whose
death could be fairly attributed to inoculation. We shall then shew,
that he constantly enjoins a certain unusual regimen to be observed
by all his patients, previous to, and during the time of, inoculation;
and lastly, we shall convince you, by unquestionable evidence, that
he administers to his patients diverse medicines, the composition of
which is an intire secret to this College, and to the whole faculty.
Gentlemen, it were needless to expatiate on the heinousness of
these crimes. Your own sagacity, and regard to justice, will be your
best guides. We shall support our allegations by incontestible proof,
and I make no doubt that you will find the Prisoner guilty of the
crimes and misdemeanors specified in the indictment. If the Court
pleases, we will now proceed to examine witnesses. Call Mr. Robert
Houlton.
Mr. Robert Houlton was sworn.
Couns. for the Cr. Do you know the Prisoner at the bar?
Houlton. I do.
Couns. for the Cr. I think, Sir, you are a clergyman?
Houlton. I am.
Couns. for the Cr. Pray, Sir, give me leave to ask you, whether you
have had any particular connection with the Prisoner?
Houlton. Yes, Sir, I was particularly connected with him. I was his
officiating clergyman.
Couns. for the Cr. Give me leave to ask you, whether you can give
the Court any information concerning the number of persons
inoculated by the Prisoner, during the last three or four years?
Houlton. In the year 1764, he inoculated
1629
In 1765 4347
In 1766 7816
In all 13792