PRODUCTION AND COSTS
Understanding Your Theory:
1. Explain carefully the difference between the economic concept of the short run versus the long run. Why do you think economists make this distinction?
2. Explain the difference between accounting profit, and economic profit. Why are economists more concerned with economic profit?
3. Why does the Marginal Cost curve cut the Average Variable Cost and the Average Total Cost curves at their minimum points? Why is minimum ATC important?
4. Fill in the gaps in the following table, and then draw on a diagram the marginal cost, average variable and average total cost curves:
|
Output
|
Total Fixed Cost
|
Total Variable Cost
|
Total Cost
|
Marginal Cost
|
Average Fixed Cost
|
Average Variable Cost
|
Average Total Cost
|
|
0
|
|
|
100
|
|
|
|
|
|
1
|
|
|
125
|
|
|
|
|
|
2
|
|
|
145
|
|
|
|
|
|
3
|
|
|
157
|
|
|
|
|
|
4
|
|
|
177
|
|
|
|
|
|
5
|
|
|
202
|
|
|
|
|
|
6
|
|
|
236
|
|
|
|
|
|
7
|
|
|
270
|
|
|
|
|
|
8
|
|
|
326
|
|
|
|
|
|
9
|
|
|
398
|
|
|
|
|
|
10
|
|
|
490
|
|
|
|
|
Applying Your Theory:
1. One of the very early successes of the Japanese manufacturing company Sony was a transistor radio small enough to fit into a shirt pocket (very rare in 1953, when it was developed). In 1955 they went to New York in search of a U.S. department store chain to carry the Sony radios. Sony offered to sell 5,000 radios to a department store chain at a price of $29.95 each. If the chain wanted more than 5,000 radios, the price would change. If a chain wanted 10,000 radios, the price per radio would be cheaper, but for an order of 30,000 radios the price would be higher than for 5,000 radios. An order of 100,000 radios would bring the price much higher again. How could this be so? Suppose that Sony became convinced that they would be able to sell more than 75,000 radios per year (assume they only supply to one chain store in the US, and gets only one order per year). What steps would they have taken?
2. Julie Johnson operates her photocopying business in a building she owns in the centre of the city. Similar buildings in the area rent for $4000 per month. Julie is considering selling her building and renting space in the suburbs for $3000 per month. Julie decides not to make the move. She reasons, 'I would like to have a store in the suburbs, but I pay no rent for my store now and I don't want to see my costs rise by $3000 per month.' What do you think of Julie's reasoning?