MICROECONOMICS BU224 Seminar Six

Agenda Course Issues and Questions Review of Chapter Eight Concepts Homework Problems Questions?

What is the purpose of this Unit? chapter is to study production and its relationship to various types of costs

The motivation for business decisions is profit maximization What is a basic assumption in economics? The motivation for business decisions is profit maximization

What is a fixed input? Any resource for which the quantity cannot change during the period of time under consideration

What is a variable input? Any resource for which the quantity can change during the period of time under consideration

What is the short run? A period of time so short that there is at least one fixed input

A period of time so long that all inputs are variable What is the long run? A period of time so long that all inputs are variable

What is the production function? The relationship between the maximum amounts of outputs a firm can produce and various quantities of inputs

What is the law of diminishing returns? The principle that beyond some point the marginal product decreases as additional units of a variable resource are added to a fixed factor

Marty’s Frozen Yogurt is a small shop that sells cups of frozen Chapter 12 #3 Marty’s Frozen Yogurt is a small shop that sells cups of frozen yogurt in a university town. Marty owns three frozen-yogurt machines. His other inputs are refrigerators, frozen-yogurt mix, cups, sprinkle toppings, and, of course, workers. He estimates that his daily production function when he varies the number of workers employed (and at the same time, of course, yogurt mix, cups, and so on) is as shown in the accompanying table.

Marty pays each of his workers $80 per day. The Chapter 12 #3 Marty pays each of his workers $80 per day. The cost of his other variable inputs is $0.50 per cup of yogurt. His fixed cost is $100 per day. a. What is Marty’s variable cost and total cost when he produces110 cups of yogurt? 200 cups? Calculate variable and total cost for every level of output given in Problem 2. b. Draw Marty’s variable cost curve. On the same diagram, draw his total cost curve. c. What is the marginal cost per cup for the first 110 cups of yogurt? For the next 90 cups? Calculate the marginal cost for all remaining levels of output.

Chapter 12 #2

Chapter 12 #3

Chapter 12 #4 a. For each of the given levels of output, calculate the average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC) per cup of frozen yogurt. b. On one diagram, draw the AFC, AVC, and ATC curves. c. What principle explains why the AFC declines as output increases? What principle explains why the AVC increases as output increases? Explain your answers. d. How many cups of frozen yogurt are produced when average total cost is minimized?

Chapter 12 #4

Figure 5.1: Average Total and Marginal Costs

Chapter 13 Questions Why does the marginal cost curve intersect the average variable and average total cost curves at their respective minimum points? If a firm wished to minimize its cost of production then what output level should it produce? How can the extent to which economies or diseconomies of scale are experienced help us to predict the size and number of real-world firms in an industry?

7. Why do marginal costs of production rise? Chapter 13 Questions 4. Some companies advertise: "We deal in high volume and pass our savings on to you in the form of lower prices." How could this be? 5. Many people search out and purchase "bargains" at garage and yard sales. What are some implicit costs associated with this type of shopping? 6. Is the "best" quantity of workers to hire where the marginal productivity of the last worker employed is the greatest (which implies an output level in which the marginal cost of producing additional units is the cheapest)? 7. Why do marginal costs of production rise?

Microeconomics Questions?