1. MICROECONOMICS BU224
Seminar
Six

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

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

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

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

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

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

8. 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

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

10. 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

13. 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.

14. 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.

16. Chapter 12 #2

17. Chapter 12 #3

18. 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?

20. Chapter 12 #4

22. Figure 5.1: Average Total and Marginal Costs

25. 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?

26. 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?

28. Microeconomics
Questions?