Dr. Shishkin
ECON 2106
Assignment #18
ANSWERS
Cost and Short-Run Production
1. Jake opens a pig farm in Idaho. To start his farm, he uses his entire $50,000 of savings
from his savings account. The bank was paying him $2,500 interest on his saving per
year. Explain why the $2,500 is one of Jake's costs.
Answer: When Jake provides the $50,000 to finance his farm's operations, he forgoes the
$2,500 in interest. Thus the opportunity cost of the $50,000 is the interest income forgone
and so the $2,500 is an implicit cost of running the farm.
Jessica is a young doctor who has just started her own practice. Her previous position
paid her $80,000 a year. For office space, she uses a building which she owns and which
she has rented in the past for $40,000 a year. Her total revenue from her new practice is
$250,000. She pays $50,000 to other firms for materials and supplies, and she pays
$40,000 in wages to her office nurse. Assume that Jessica's building and equipment do
not depreciate and that her normal profit is $20,000.
2. What are Jessica's explicit costs?
Answer: Jessica's explicit costs are the wages and the amount she paid to other firms for
material and supplies. Hence her explicit costs equal $40,000 + $50,000 = $90,000.
3. What are Jessica's implicit costs?
Answer: Jessica's implicit costs are her forgone wages, the forgone rent on her building,
and her normal profit. Hence her implicit costs equal $80,000 + $40,000 + $20,000 =
$140,000.
4. What is the opportunity cost of all factors of production employed by Jessica?
Answer: The opportunity cost equals the sum of explicit costs plus implicit costs, so
Jessica's opportunity cost equals $90,000 + $140,000 = $230,000.
5. What is Jessica's economic profit?
Answer: Economic profit equals total revenue minus total opportunity cost, or $250,000 $230,000 = $20,000.
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Dr. Shishkin
ECON 2106
Quantity
of Labor
1
Average
product
10
Worker
1st
Marginal
product
10
2
12.5
2nd
15
rd
20
3
15
3
4
15
4th
15
5
14
5th
10
The above table shows the total product schedule for Hair Today, a hair styling salon.
6. Calculate each worker’s average product, plot the numbers on the diagram below.
Answer: See table above.
7. Calculate each worker’s marginal product, plot the numbers on the diagram
below.
Answer: See table above.
8. What happens with the average product of labor as the marginal product of labor
drops below it?
Answer: The average product starts decreasing as soon as the marginal product drops
below it
9. Over what range of workers there are increasing marginal returns?
Answer: There are increasing marginal returns for the first 3 workers.
10. Over what range there are decreasing marginal returns?
Answer: Starting with the third worker, there are decreasing marginal returns.
Email me at [email protected], and text at (678) 524-5535 if I don’t respond
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