Solutions for Homework 4

Chapter 5: Problem 4

a. TFC|Q=10 = $100 = $100

b. TVC|Q=10 = $20*10 + $15*102 + $10*103 = $11,700.

c. TC|Q=10 = 100 + 20(10) + 15(10)2 + 10(10)3 = $11,800.

d. AFC|Q=10 = $100/10=$10.

e. AVC|Q=10 = TVC|Q=10 / 10 = $11,700/10 = $1,170.

f. SAC|Q=10 = AFC|Q=10 + AVC|Q=10 = $1,180.

g. MC|Q=10 = $20 + $30*10 + $30*102 = $3,320.

Chapter 5: Problem 6

Q FC VC TC AFC AVC ATC MC

0 15,000 0 15,000 - - - -
100 15,000 15,000 30,000 150 150 300 150
200 15,000 25,000 40,000 75 125 200 100
300 15,000 37,500 52,500 50 125 175 125
400 15,000 75,000 90,000 37.5 187.5 225 375
500 15,000 147,500 162,500 30 295 325 725
600 15,000 225,000 240,000 25 375 400 775

Chapter 5: Problem 7

a. Economies of scope exist since f aQ1Q2 = 90 (-0.5) Q1Q2 > 0 and fixed cost f 0 always.

b. Cost complementarities exist since a 0.5 0 .

c. Since a 0.5 0 , MC1 will increase if the division that produces product 2 is sold.
 Problem Set: Problem 18

Marginal
Units of Units of Average
Units of Product of
Fixed Variable Product of TFC TVC TC AFC SAC MC
Output Variable
Input Input Variable Input
Input

100 0 0 1,000 0 1,000

100 20 600 30 30 1,000 400 1,400 1.67 2.33 0.67

100 40 1,500 45 37.5 1,000 800 1,800 0.67 1.20 0.44

100 60 2,000 25 33.3 1,000 1,200 2,200 0.50 1.10 0.80

100 80 2,200 10 27.5 1,000 1,600 2,600 0.45 1.18 2.00

100 100 2,300 5 23 1,000 2,000 3,000 0.43 1.30 4.00

Problem Set: Problem 19

a. $2,000; $2,000

b. $1.00; $0.40

c. AVC = TVC/Q = (15Q 6Q2 + Q3)/Q = 15 6Q + Q2 = 15 6*20 + 202 = 295

d. MC = dTC/dQ = dTVC/dQ = 15 12Q + 3Q2 = 15 12*20 + 3*202 = 975

e. SAC = TC/Q = (2,000 + 15Q 6Q2 + Q3)/Q = 2,000/20 + 15 6*20 + 202 = 395

f. The diminishing marginal returns start at min MC: dMC/dQ = 12 + 6Q = 0 => Q=2

g. The diminishing average returns start at min AVC: dAVC/dQ = 6 + 2Q = 0 => Q=3

Problem Set: Problem 20

a. TFC = PK*K = $100*10 = $1,000 => AFC = TFC/Q = 1,000/400 = 2.5

b. AVC = PL/APL = 30/15 = 2

c. MC = PL/MPL = 30/15 = 2
Problem Set: Problem 21

Q TFC TVC TC AFC AVC SAC MC

0 10,000 0 10,000

1 10,000 1,000 11,000 10,000 1,000 11,000 1,000

2 10,000 1,800 11,800 5,000 900 5,900 800

3 10,000 2,556 12,556 3,333 852 4,185 756

4 10,000 3,400 13,400 2,500 850 3,350 844

5 10,000 4,400 14,400 2,000 880 2,880 1,000

6 10,000 5,640 15,640 1,667 940 2,607 1,240

7 10,000 7,175 17,175 1,433 1,025 2,458 1,535

8 10,000 9,040 19,040 1,250 1,130 2,380 1,865

Problem Set: Problem 22

a. Marginal returns to the variable input (marginal productivity) starts to diminish beyond a certain
level of employment.

b. If LRAC is flat, the technology exhibits Constant Returns to Scale, and LRAC = LRMC.

$
units

LRAC = LRMC

Q
Problem Set: Problem 23

a. Since CA|Q=8 = 128 > CB|Q=8 = 114, plant B should be built.

 CA = 80 + 2Q + 0.5Q2 50 + Q2 = CB => 0 0.5Q2 2Q 30 => Q 10 plant A more efficient.

b. Minimum cost condition MCA = 2 + QA = 2QB = MCB

and planned production QA + QB = 22
result in a system of equations in two unknowns with simultaneous solution: QA = 14 and QB = 8.

Minimum cost condition: C = CA + CB = 80 + 2*14 + 0.5*142 + 50 + 82 = 320

If only plant A were used: CA = 80 + 2*22 + 0.5*222 = 366 > 320

If only plant B were used: CB = 50 + 222 = 534 > 320

Problem Set: Problem 24

L Q APL MP L SMC AVC AFC STC

0 0 0 672

2 10 5.00 5.0 40.00 40.00 67.2 1,072

4 28 7.00 9.0 22.22 28.57 24.0 1,472

6 48 8.00 10.0 20.00 25.00 14.0 1,872

8 56 7.00 4.0 50.00 28.57 12.0 2,272

10 60 6.00 2.0 100.00 33.33 11.2 2,672

12 63 5.25 1.5 133.33 38.10 10.7 3,072