Professional Documents
Culture Documents
1.
Which of the following news items involves a short-run decision and which
involves a long-run decision? Explain
January, 31, 2008: Starbucks will open 75 more stores abroad than originally
predicted, for a total of 975.
This decision is a long-run decision. It increases the quantity of all of
Starbucks factors of production, labor and the size of Starbucks plant.
February, 25, 2008: For three hours on Tuesday, Starbucks will shut down every
single one of its 7,100 stores so that baristas can receive a refresher course.
This decision is a short-run decision. It involves increasing the quality of
Starbucks labor and so only one factor of productionlaborchanges and all
the other factors remain fixed.
June, 2, 2008: Starbucks replaces baristas with vending machines.
This decision is a short-run decision. It involves changing two of Starbucks
factors of production, labor and one type of capital. But other factors of
production, such as Starbucks land and other capital inputs such as the store
itself, remain fixed.
July, 18, 2008: Starbucks is closing 616 stores by the end of March.
This decision is a long-run decision. It decreases the quantity of all of
Starbucks
factors of production, labor and
the size of
Starbucks plant.
Labor
Output
(workers
(surfboards
2.
The table sets
out Sues Surfboards total product
per
week)
per
week)
schedule.
1
30
a. Draw the total
product curve.
2
70
To draw
the total product curve measure
3
120
labor on
the x-axis and output on the y-axis.
4
160
The total
product curve is upward sloping
5
190
and is
illustrated in Figure 11.1.
6
210
b. Calculate the
average product of labor and draw
7
220
the average
product curve.
The average product of labor is equal to total product divided by the quantity of
labor employed. For example, when 3 workers are employed, they produce 120
surfboards a week, so average product is 40 surfboards per worker. As Figure
11.2 (on the next page) shows, the average product curve is upward sloping
when up to 3 workers are hired and then is downward sloping when more than 4
workers are hired.
3.
30
AFC
(dollars
per
surfboard)
33.33
AVC
(dollars
per
surfboard)
16.67
ATC
(dollars
per
surfboard)
50.00
70
14.29
14.29
28.58
Output
(surfboards)
MC
(dollars
per
surfboard)
12.50
10.00
120
8.33
12.50
20.83
12.50
160
6.25
12.50
18.75
16.67
190
5.26
13.16
18.42
25.00
210
4.76
14.29
19.05
50.00
220
4.55
15.91
20.46
Average fixed cost is total fixed cost per unit of output. Average variable cost is
total variable cost per unit of output. Average total cost is the total cost per unit
of output. For example, take the case in which the firm makes 160 surfboards a
week. Total fixed cost is $1,000, so average fixed cost is $6.25 per surfboard;
total variable cost is $2,000, so average variable cost is $12.50 per surfboard;
and, total cost is $3,000, so average total cost is $18.75 per surfboard. Marginal
30
30.0
70
35.0
120
40.0
160
40.0
AVC
(dollars
per
surfboard
)
16.67
40.0
12.50
14.29
50.0
10.00
12.50
40.0
12.50
12.50
30.0
5
190
38.0
16.67
13.16
20.0
6
210
35.0
25.00
14.29
10.0
7
220
31.4
MC
(dollars
per
surfboard
)
50.00
15.91
The table sets out the AP and MP data used to draw the curves. Figure 11.5
shows the curves and the relationships. When the AP curve rises the AVC curve
falls and vice versa. When the MP curve rises the MC curve falls and vice versa.
4.
5.
Figure 11.7 shows an airlines TFC and TVC curves; Figure 11.8 shows an
airlines AFC, AVC, and MC curves. The increase in the price of fuel has no
effect on the airlines fixed cost, so the TFC and AFC curves do not change. The
increase in the price of fuel raises the firms variable costs and its total costs. As
a result the firms TVC, AVC and MC curves shift upward as illustrated in the
figures from the curves labeled 0to the curves labeled 1.
d. Explain how a technological advance that makes an airplanes engines more fuel
efficient changes an airlines total product, marginal product, and average product.
This situation is an example of technological change that is embodied in capital.
This change will allow the airline to produce more outputpassenger miles
using fewer resources. Hence the airlines total product, marginal product, and
average product all increase.
e. Draw a graph to illustrate the effects of more fuel efficient aircraft on an airlines
TP, MP, and AP curves.
Figure 11.9 shows the airlines TP curves. The new engines shift the TP curve
upward from TP0 to TP1. Figure 11.10 shows the airlines MP and AP curves.
These curves also shift upward as a result of the new fuel efficient engines.
f. Explain how a technological advance that makes an airplanes engines more fuel
efficient changes an airlines average variable cost, marginal cost and average
total cost.
The airlines average variable cost and marginal cost both decrease. The new
engines that use the new technology are presumably more expensive than the
older, less fuel efficient engines. The engines are a fixed cost. So at lower levels
of output the new average total cost is higher than the old average total cost
while at larger levels of output the new average total cost is lower than the old
average total cost.
g. Draw a graph to illustrate how a
technological advance that makes an
airplane engine more fuel efficient
changes an airlines AVC, MC, and ATC
curves.
Figure 11.11 illustrates these changes.
The airlines AVC and MC curves shift
downward as indicated by the shift from
the grey curves labeled 0 to the black
curves labeled 1. At lower levels of
output the ATC curve shifts upward and
at larger levels of output the ATC curve
shifts downward.
8.
The table shows the production function
of Jackies Canoe Rides. Jackies pays $100 a day
for each canoe it rents and $50 a day for each
canoe operator it
Labor
Output
hires.
(workers
(rides per day)
a. Graph the ATC
per day)
Plant 1
Plant 2
Plant 3
curve for Plant 1
10
20
40
55
and Plant 2.
20
40
60
75
To find the average
30
65
75
90
total cost for each
40
75
85
100
plant, at the different Canoes
10
20
30
levels of output add
the cost of the workers, $50 per worker, and the
fixed cost, the cost of the canoes, $100 per canoe.
So for plant 1, the total cost for 20 rides is $1,500;
for 40 rides is $2,000; and, for 65 rides is $2,500.
The average total cost is calculated by dividing the
total cost by the quantity of rides. These average
total costs are plotted in Figure 11.12. (The
average total cost curve for one plant, ATC1, is the
same as the thicker curve through the first 4
points.)
Plant 4
65
85
100
110
40
b. On your graph in a, plot the ATC curve for Plant 3 and Plant 4.
These are drawn in Figure 11.12.
c. On Jackies LRAC curve, what is the average cost of producing 40, 75, and 85
rides a week?
The long-run average total cost curve is illustrated in Figure 11.12 as the thicker
curve. It is comprised of the parts of the short-run average total cost curves that
are the minimum average total cost for the different levels of output. From this
curve, the average cost of producing 40 rides is $50; of producing 75 rides is
$40; and the average cost of producing 85 rides is $47.06.
d. What is Jackies minimum efficient scale?
Jackies minimum efficient scale is the smallest quantity at which the long-run
average cost is the lowest. Jackies minimum efficient scale is 65 canoe rides
where, with one plant, the average total cost is $38.46.
e. Explain how Jackies uses its LRAC cost curve to decide how many canoe to rent.
Jackies will use its long-run average total cost curve by building the size of the
plant that minimizes its long-run average cost at the level of output that Jackies
expects to produce.
f. Does Jackies production function feature economies of scale or diseconomies of
scale?
Jackies has both economies of scale for up to 65 canoe rides and then
diseconomies of scale for more than 65 canoe rides.
9.
Business Boot Camp
At a footwear company called Caboots, sales rose from $160,000 in 2000 to $2.3
million in 2006. But in 2007 sales dipped to $1.5 million. Joey and Priscilla
Sanchez, who run Caboots, blame the decline partly on a flood that damaged the
firms office and sapped morale.
Based on a Fortune article, CNN, April 23, 2008
If the Sanchezes are correct in their assumptions and the prices of footwear didnt
change
a. Explain the effect of the flood on the total product curve and marginal product
curve at Caboots.
The total product curve shifted downward as a result of the flood and sapped
morale. That is, the factors of production produced less footwear in 2007 than in
2006. The downward shift in the total product curve decreased the marginal
product so the marginal product curve also shifted downward.
b. Draw a graph to show the effect of the flood on the total product curve and
marginal product curve at Caboots.
Figure 11.13 shows the downward shift in the total product curve and Figure
11.14 shows the downward shift in the marginal product curve. The flood and
lack of morale shift the TP and MP curves downward from TP1 to TP2 and from
MP1 to MP2.
10.
b.
Draw a graph to show your predicted effects of physically linking machines on
the firms short-run product curves and cost curves.