The accompanying table shows a car manufacturer’s total cost of producing cars.
a) What is this
manufacturer’s fixed cost?
b) For each level of output, calculate the variable cost (VC). For each level of output
except zero output, calculate the average variable cost (AVC), average total cost
(ATC), and average fixed cost (AFC). What is the minimum-cost output?
c) For each level of output, calculate this manufacturer’s marginal cost (MC).
d) On one diagram, draw the manufacturer’s AVC, ATC, and MC curves.
2. Labor costs represent a large percentage of total costs for many firms. According to data from
the Bureau of Labor Statistics, U.S. labor costs were up 2.0% in 2019, compared to 2018.
a) When labor costs increase, what happens to average total cost and marginal cost?
Consider a case in which labor costs are only variable costs and a case in which they
are both variable and fixed costs.
An increase in labor productivity means each worker can produce more output. Recent data on
productivity show that labor productivity in the U.S. nonfarm business sector grew by 1.7% between
1970 and 1999, by 2.6% between 2000 and 2009, and by 1.0% between 2010 and 2019.
b) When productivity growth is positive, what happens to the total product curve and
the marginal product of labor curve? Illustrate your answer with a diagram.
c) When productivity growth is positive, what happens to the marginal cost curve
and the average total cost curve? Illustrate your answer with a diagram.
d) If labor costs are rising over time on average, why would a company want to
adopt equipment and methods that increase labor productivity?
3. Your roommate is having difficulty understanding how a firm can keep operating despite losing
money, earning a negative profit. How will firms respond to losing money?
Quantity of cars TC
0 $500,000
1 540,000
2 560,000
3 570,000
4 590,000
5 620,000
6 660,000
7 720,000
8 800,000
9 920,000
10 1,100,000

4. Bob produces flower pots for sale, which he designs and manufactures using 3-D printing
technology. Bob rents a building for $30,000 per month and rents machinery for $20,000 a month.
Those are his fixed costs. His variable cost per month is given in the accompanying table.
Quantity of flower pots VC
0 $0
1,000 5,000
2,000 8,000
3,000 9,000
4,000 14,000
5,000 20,000
6,000 33,000
7,000 49,000
8,000 72,000
9,000 99,000
10,000 150,000
a) Calculate Bob’s average variable cost, average total cost, and marginal cost for
each quantity of output.
b) There is free entry into the industry, and anyone who enters will face the same
costs as Bob. Suppose that currently the price of a flower pot is $25. What will Bob’s
profit be? Is this a long-run equilibrium? If not, what will the price of a flower pot be
in the long run?
Assume this is a perfectly competitive industry
c) What is Bob’s break-even price? What is his shut-down price?
d) Suppose the price of a flower pot is $2. What should Bob do in the short run?
e) Suppose the price of a flower pot is $7. What is the profit-maximizing quantity of
flower pots that Bob should produce? What will his total profit be? Will he produce
or shut down in the short run? Will he stay in the industry or exit in the long run?
5. Each of the following firms possesses market power. Explain its source.
a) Merck, the producer of the patented cholesterol-lowering drug Zetia
b) Waterworks, a provider of piped water
c) Chiquita, a supplier of bananas and owner of most banana plantations
d) The Walt Disney Company, the creators of Mickey Mouse
6. Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five
potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at
most one diamond—and only if the price is just equal to, or lower than, her willingness to pay.
Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and Sophia’s, $0.

De Beers’s marginal cost per diamond is $100. The result is a demand schedule for diamonds as
follows:
Price of diamond Quantity of diamonds demanded
$500 0
400 1
300 2
200 3
100 4
0 5
a) Calculate De Beers’s total revenue and its marginal revenue. From your
calculation, draw the demand curve and the marginal revenue curve.
b) Explain why De Beers faces a downward-sloping demand curve and why the
marginal revenue from an additional diamond sale is less than the price of the diamond.
c) Suppose De Beers currently charges $200 for its diamonds. If it lowers the price
to $100, how large is the price effect? How large is the quantity effect?
d) Add the marginal cost curve to your diagram from part a and determine which
quantity maximizes De Beers’s profit and which price De Beers will charge.

Question

The accompanying table shows a car manufacturer’s total cost of producing cars.
a) What is this
manufacturer’s fixed cost?
b) For each level of output, calculate the variable cost (VC). For each level of output
except zero output, calculate the average variable cost (AVC), average total cost
(ATC), and average fixed cost (AFC). What is the minimum-cost output?
c) For each level of output, calculate this manufacturer’s marginal cost (MC).
d) On one diagram, draw the manufacturer’s AVC, ATC, and MC curves.
2. Labor costs represent a large percentage of total costs for many firms. According to data from
the Bureau of Labor Statistics, U.S. labor costs were up 2.0% in 2019, compared to 2018.
a) When labor costs increase, what happens to average total cost and marginal cost?
Consider a case in which labor costs are only variable costs and a case in which they
are both variable and fixed costs.
An increase in labor productivity means each worker can produce more output. Recent data on
productivity show that labor productivity in the U.S. nonfarm business sector grew by 1.7% between
1970 and 1999, by 2.6% between 2000 and 2009, and by 1.0% between 2010 and 2019.
b) When productivity growth is positive, what happens to the total product curve and
the marginal product of labor curve? Illustrate your answer with a diagram.
c) When productivity growth is positive, what happens to the marginal cost curve
and the average total cost curve? Illustrate your answer with a diagram.
d) If labor costs are rising over time on average, why would a company want to
adopt equipment and methods that increase labor productivity?
3. Your roommate is having difficulty understanding how a firm can keep operating despite losing
money, earning a negative profit. How will firms respond to losing money?
Quantity of cars TC
0 $500,000
1 540,000
2 560,000
3 570,000
4 590,000
5 620,000
6 660,000
7 720,000
8 800,000
9 920,000
10 1,100,000

4. Bob produces flower pots for sale, which he designs and manufactures using 3-D printing
technology. Bob rents a building for $30,000 per month and rents machinery for $20,000 a month.
Those are his fixed costs. His variable cost per month is given in the accompanying table.
Quantity of flower pots VC
0 $0
1,000 5,000
2,000 8,000
3,000 9,000
4,000 14,000
5,000 20,000
6,000 33,000
7,000 49,000
8,000 72,000
9,000 99,000
10,000 150,000
a) Calculate Bob’s average variable cost, average total cost, and marginal cost for
each quantity of output.
b) There is free entry into the industry, and anyone who enters will face the same
costs as Bob. Suppose that currently the price of a flower pot is $25. What will Bob’s
profit be? Is this a long-run equilibrium? If not, what will the price of a flower pot be
in the long run?
Assume this is a perfectly competitive industry
c) What is Bob’s break-even price? What is his shut-down price?
d) Suppose the price of a flower pot is $2. What should Bob do in the short run?
e) Suppose the price of a flower pot is $7. What is the profit-maximizing quantity of
flower pots that Bob should produce? What will his total profit be? Will he produce
or shut down in the short run? Will he stay in the industry or exit in the long run?
5. Each of the following firms possesses market power. Explain its source.
a) Merck, the producer of the patented cholesterol-lowering drug Zetia
b) Waterworks, a provider of piped water
c) Chiquita, a supplier of bananas and owner of most banana plantations
d) The Walt Disney Company, the creators of Mickey Mouse
6. Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five
potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at
most one diamond—and only if the price is just equal to, or lower than, her willingness to pay.
Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and Sophia’s, $0.

De Beers’s marginal cost per diamond is $100. The result is a demand schedule for diamonds as
follows:
Price of diamond Quantity of diamonds demanded
$500 0
400 1
300 2
200 3
100 4
0 5
a) Calculate De Beers’s total revenue and its marginal revenue. From your
calculation, draw the demand curve and the marginal revenue curve.
b) Explain why De Beers faces a downward-sloping demand curve and why the
marginal revenue from an additional diamond sale is less than the price of the diamond.
c) Suppose De Beers currently charges $200 for its diamonds. If it lowers the price
to $100, how large is the price effect? How large is the quantity effect?
d) Add the marginal cost curve to your diagram from part a and determine which
quantity maximizes De Beers’s profit and which price De Beers will charge.

Accepted Answer

In economics, cost is the value of resources that are used to produce a good or service. This…