EC155A and B

October 20, 2002

Take-home exercise 1

 

  1. Using the data that we reviewed in class on Friday (see the table below), discuss why one can determine the profit maximizing point from only the data in the ‘Marginal Costs’ column.  What is the profit maximizing amount of sign production?

 

The Short-term Production and Costs of Midd Signs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRODUCTION

COSTS

BOTTOM LINE

INPUT (labor)

OUTPUT (signs)

MARGINAL PRODUCT

FIXED COSTS (FC)

VARIABLE COSTS (VC)

TOTAL COSTS (TC)

MARGINAL COSTS (MC)

AVERAGE FIXED COSTS (AFC)

AVERAGE VARIABLE COSTS (AVC)

AVERAGE TOTAL COSTS (ATC)

REVENUE

PROFIT

L

Q=f(L,X)

MP = ΔQ/ΔL

Costs of X

VC = W*L

TC = FC+VC

MC = ΔTC/ΔQ

AFC = FC/Q

AVC = VC/Q

ATC = TC/Q

R = P*Q

Π=P*Q – TC

1

4

4

$20.00

$15.00

$35.00

 

$5.00

$3.75

$8.75

 

 

2

9

5

$20.00

$30.00

$50.00

$3.00

$2.22

$3.33

$5.56

 

 

3

13

4

$20.00

$45.00

$65.00

$3.75

$1.54

$3.46

$5.00

 

 

4

16

3

$20.00

$60.00

$80.00

$5.00

$1.25

$3.75

$5.00

 

 

5

18

2

$20.00

$75.00

$95.00

$7.50

$1.11

$4.17

$5.28

 

 

6

19

1

$20.00

$90.00

$110.00

$15.00

$1.05

$4.74

$5.79

 

 

7

18

-1

$20.00

$105.00

$125.00

-$15.00

$1.11

$5.83

$6.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The price of a Midd Sign:

 

 

$10.00

 

 

 

 

 

 

Wage rate:

 

 

 

$15.00

 

 

 

 

 

 

Fixed cost of materials (paper, staples, pen):

 

$20.00

 

 

 

 

 

 

 

  1. Confirm your answer by filling in the last two columns of the table.

 

  1. What would be the profit maximizing amount of sign production if the fixed cost were $40?  What would be the profit maximizing amount of sign production if the fixed cost were $120?  Justify your answers.

 

  1. With ‘cost per unit’ on the vertical axis and ‘quantity of signs’ on the horizontal axis, plot the AFC, AVC, ATC, and MC curves, using the data in the table. 

 

  1. Using the table and/or the graph, explain why:

 

a)      The AFC is always falling;

b)     The AVC first falls and then rises;

c)      The ATC first falls and then rises;

d)     MC first falls and then rises.

 

  1. Plot the price of $10 on the same graph.  Can you find the area that represents profits?  [HINT: Profit = Revenue – Costs = P*Q – ATC*Q.]