Deck 8: Short-Run Costs and Output Decisions

Question 1

What is meant by fixed cost? What kinds of things might be included in fixed cost?

Answer 1

Fixed cost is any cost that does not depend on the firm's level of output. These costs are incurred even if the firm is producing nothing. Examples would include payments on a long-term lease, insurance premiums, and contract obligations for some workers.

Question 2

Assume that we only have data on total cost when output is equal to zero and no other cost information at our disposal. How could we possibly know what the fixed costs are for the firm?

Answer 2

If we know what the total costs are at an output level of zero we don't need any more information to figure out the fixed costs. In this case the fixed costs would equal to the total costs since at an output level of zero there wouldn't be any variable costs. Since total costs is the sum of the fixed and variable costs this is what allows us to say that total costs equal the fixed costs of the firm.

Question 3

Comment on the following statement: "In the short run, a firm's total costs will be zero if the firm chooses to produce nothing."

Answer 3

The statement is likely to be false. If a firm has any fixed costs at all, the firm's total costs will not be equal to zero even if it produces zero output.

Question 4

What three things must a firm know in order to calculate costs?

Question 5

Explain why the average total cost curve and the average variable cost curve get closer to each other as output expands.

Question 6

Use the graph below to calculate the marginal cost of the first, second and third unit of output.

Question 7

Define what is meant by the period known as the short run.

Question 8

What is meant by variable cost? What kinds of things might be included in variable cost?

Question 9

Assume that you have data on a firm's average fixed cost and average variable cost for various levels of output and you are asked to calculate the total variable cost and total cost of the firm. Would this be enough information to perform this calculation? Explain

Question 10

If total costs are $18,000 for the year, and the firm has fixed costs of $12,000, what is the level of the firm's variable costs?

Question 11

Under which circumstances could the marginal cost and average variable cost curves be one and the same?

Question 12

Mark's Fabrics produces fabric for window curtains. The firm's fixed costs are $500 per day. The firm's variable costs vary with the level of output as follows:
Fill in the column for total cost.

Question 13

What is meant by spreading overhead?

Question 14

If a firm shuts down in the short run, will it have zero costs or not? Explain.

Question 15

Comment on the following statement: "Average fixed cost falls as output rises, but average fixed cost will never be equal to zero."

Question 16

If General Motors cuts back production on the Hummer because of high gasoline prices what should you expect to happen to the average fixed cost of production? What about the average total cost?

Question 17

Assume that fixed costs for a firm are $1,000. Draw a graph for the fixed cost of this firm accompanied by a graph of the average fixed cost. Explain the shape of the average fixed cost graph.

Question 18

What is the formula for calculating average fixed cost? If a firm has fixed costs of $8,500 per month and produces 1,900 units of output per month, what is its average fixed cost?

Question 19

Explain the relationship between marginal cost and average variable cost.

Question 20

What is the relationship between average fixed cost and output?

Question 21

Prove that marginal cost is actually the slope of the total variable cost curve.

Question 22

A bank manager advises all of his loan officers that the average cost of funds for the bank over the past year has been 6%. The bank has borrowed $1 million at 5%, another $1 million at 6% and another $1 million at 7%. Future borrowing costs are expected to continue at 7%. The manager however, instructs his loan officers that they are authorized to make loans at interest rates that are equal to or greater than the bank's average cost of borrowing. How would you evaluate the bank manager's decision?

Question 23

The equation for the firm's total variable costs is given by TVC = 5q. The firm's total fixed costs are $10. What is the equation for the firm's TC curve? Draw the firm's TVC, TFC, TC, MC, AVC, and ATC cost curves. Does the firm's cost curve have the usual shape? Why or why not?

Question 24

Prove that the total cost curve and the total variable cost curve have the same slope.

Question 25

What is the relationship between marginal cost and fixed cost?

Question 26

What is the relationship between total variable cost and marginal cost? Explain.

Question 27

What two things does the level of total variable costs depend on?

Question 28

Using the graph below draw a marginal cost curve that would likely be the result. Use the output level of 200 as a reference point and explain why you drew it the way you did.

Question 29

How is average variable cost calculated? If a firm has total variable costs of $19,200 when producing 575 units, what is the firm's average variable cost?

Question 30

Suppose that a firm has an average variable cost of $52.50 when producing 120 units of output. What is the firm's total variable cost?

Question 31

Why does marginal cost eventually rise as output increases?

Question 32

Patty's Pizza Palace faces the following hourly cost schedule:
Fill in the column for marginal cost.

Question 33

Draw two graphs. In the first graph draw a total variable cost curve. In the second graph, draw the corresponding marginal cost and average variable cost curve.

Question 34

Explain how it might be possible for the total variable cost function to be linear? Explain.

Question 35

Draw two graphs: one showing how fixed cost varies with output and the other showing how average fixed cost varies with output.

Question 36

What does marginal cost measure?

Question 37

Stu's Shoe Company faces the following cost schedule:
Fill in the blanks.

Question 38

Draw two graphs: one showing how total variable cost varies with output and the other showing how average variable cost varies with output.

Question 39

What do diminishing returns imply about the production process?

Question 40

What is the shape of the total variable cost curve? Explain.

Question 41

Draw total fixed cost, total variable cost, and total cost on the same set of axes.

Question 42

What is meant by marginal revenue?

Question 43

The president of a company is told that the fixed costs next year will be higher than anticipated. Even so he has told his operations managers that this should not affect their production levels. Comment on this statement.

Question 44

How is total revenue calculated? If a firm sells 350 units of a product at a price of $8 each, what is the firm's total revenue?

Question 45

Laura's Cookie Company faces the following cost schedule for making cookies by the dozen:
Fill in the blanks above.

Question 46

If marginal costs for a firm are constant would the average total cost curve still have be u-shaped? Explain.

Question 47

White Paper Company faces the following cost schedule for producing reams of paper:
Fill in the columns for average fixed cost, average variable cost, average total cost, and marginal cost.

Question 48

When XYZ Corporation produces 35 units of output its average variable cost is $5. The marginal cost of the 36th unit of output is $7. If the firm chooses to produce the 36th unit of output, what will happen to average variable cost? Explain.

Question 49

Assume a firm is operating under conditions of pure competition and faces a marginal cost function that is everywhere below its average total cost. If the firm is producing where marginal revenue equals marginal cost will it be possible for it to make an economic profit? Explain.

Question 50

It is common to see convenience stores open 24 hours a day even though many times late at night or in the early hours of the morning there are very few customers. What can explain this seemingly odd behavior?

Question 51

What is the relationship between average total cost and marginal cost?

Question 52

What is the relationship between average total cost, average variable cost, and average fixed cost? If average total cost is $5.76 and average fixed cost is $1.35, what is the level of average variable cost?

Question 53

Draw average variable cost, average total cost, and marginal cost on the same set of axes.

Question 54

Martin's Barber Shop faces the following schedule for producing haircuts:
Fill in the columns for average fixed cost, average variable cost, average total cost, and marginal cost.

Question 55

How is it possible for marginal cost to equal to the slope of either the total variable cost function or the total cost function?

Question 56

When Little Furniture Company produces 100 chairs - its average variable cost is $25. The marginal cost of the 101st chair is $22. If the firm chooses to produce the 101st chair, what will happen to average variable cost? Explain.

Question 57

The market for light bulbs is perfectly competitive and can be represented by the following market demand and supply curves: Draw the demand curve as seen by one firm in the light bulb industry. Explain the shape of this curve.

Question 58

When Peter's Pizza Company produces 50 pizzas, its average total cost is $8. The marginal cost of the 51st pizza is $7. If the firm chooses to produce the 51st pizza, what will happen to average total cost? Explain.

Question 59

How is average total cost calculated? If the total cost of producing 190 units of output is $355, what is the average total cost?