Ch. 11 Study Guide

Q1. Which of the following are examples of a firm experiencing positive technological change?

Background

Topic: Technological Change in Production

This question tests your understanding of what constitutes a positive technological change in a firm's production process. Positive technological change means the firm can produce more output with the same inputs, or the same output with fewer inputs, often due to innovation, improved processes, or better organization.

Key Terms:

• Technological Change: A change in a firm's ability to produce a given level of output with a given quantity of inputs.

• Positive Technological Change: When a firm can produce more output with the same inputs or the same output with fewer inputs.

Step-by-Step Guidance

1. Read each scenario and ask: Does the change allow the firm to produce more output with the same or fewer resources?

2. For each, consider if the improvement is due to better technology, organization, or worker productivity (not just cost savings).

3. Remember, a reduction in costs (like lower wages) without a change in output or input efficiency is not technological change.

4. For scenarios involving training or health, think about whether these changes make workers more productive with the same resources.

5. For changes in factory layout, consider if output increases with the same inputs, or if it's just a reorganization with no productivity gain.

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Q2. What is the variable cost of production (per month) for a pizza parlor with given per-pizza and monthly costs?

Background

Topic: Cost Structure in Production

This question tests your ability to distinguish between variable and fixed costs and calculate total variable cost for a given level of output.

Key Terms and Formulas:

• Variable Cost (VC): Costs that change with the level of output (e.g., labor, ingredients, electricity per pizza).

• Fixed Cost (FC): Costs that do not change with output (e.g., rent, insurance).

• Total Variable Cost Formula:

$VC = (\text{Labor cost per pizza} + \text{Ingredients cost per pizza} + \text{Electricity cost per pizza}) \times \text{Number of pizzas}$

Step-by-Step Guidance

1. Identify which costs are variable (per pizza) and which are fixed (per month).

2. Add up all the variable costs per pizza.

3. Multiply the total variable cost per pizza by the number of pizzas produced per month.

4. Do not include fixed costs in this calculation.

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Q3. What is the fixed cost of production (per month) for the pizza parlor?

Background

Topic: Fixed Costs in Production

This question checks your understanding of which costs remain constant regardless of output and how to sum them.

Key Terms:

• Fixed Cost (FC): Costs that do not vary with the level of output (e.g., rent, insurance).

Step-by-Step Guidance

1. Identify all costs that are paid per month, regardless of how many pizzas are produced.

2. Add together the monthly rent and insurance costs.

3. Do not include any per-pizza costs in this calculation.

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Q4. What is Charles's implicit cost of production for his lawn-mowing company?

Background

Topic: Implicit Costs and Opportunity Cost

This question tests your understanding of implicit (non-monetary) costs, including foregone income and the opportunity cost of capital.

Key Terms and Formulas:

• Implicit Cost: The opportunity cost of using resources owned by the firm (e.g., foregone salary, interest, depreciation).

• Opportunity Cost: The value of the next best alternative forgone.

• Formula for Implicit Cost:

$\text{Implicit Cost} = \text{Foregone Salary} + (\text{Equipment Cost} \times \text{Interest Rate}) + (\text{Equipment Cost} \times \text{Depreciation Rate})$

Step-by-Step Guidance

1. Identify the foregone salary (what Charles would have earned as a lifeguard).

2. Calculate the opportunity cost of the money used to buy equipment (equipment cost times interest rate).

3. Calculate the depreciation cost (equipment cost times depreciation rate).

4. Add all these components together to find the total implicit cost.

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Q5. Fill in total cost and average total cost in the flower production table.

Background

Topic: Short-Run Production Costs

This question tests your ability to calculate total cost (TC) and average total cost (ATC) given labor and capital costs, and output levels.

Key Terms and Formulas:

• Total Cost (TC): The sum of all costs incurred in production.

• Average Total Cost (ATC): Total cost divided by output.

• Formulas:

$TC = (\text{Number of Gardeners} \times \text{Wage per Gardener}) + (\text{Number of Greenhouses} \times \text{Rent per Greenhouse})$

$ATC = \frac{TC}{\text{Output}}$

Step-by-Step Guidance

1. For each row, multiply the number of gardeners by the daily wage, and add the cost of renting the greenhouse.

2. Sum these to get total cost for each combination.

3. Divide the total cost by the output to get average total cost (for rows where output is not zero).

4. Round average total cost to two decimal places as instructed.

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Q6. What is the difference between the short run and the long run in production?

Background

Topic: Short Run vs. Long Run in Production

This question tests your understanding of how input flexibility differs between the short run and the long run for firms.

Key Terms:

• Short Run: At least one input is fixed.

• Long Run: All inputs can be varied; firms can also adopt new technology and change scale.

Step-by-Step Guidance

1. Review the definitions of short run and long run in microeconomics.

2. Look for the answer choice that correctly states that at least one input is fixed in the short run, and all inputs are variable in the long run.

3. Check if the answer also mentions the ability to adopt new technology and change the size of the firm in the long run.

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Q7. Calculate average and marginal product of labor for a pizza restaurant, and identify when diminishing returns set in.

Background

Topic: Marginal and Average Product of Labor; Law of Diminishing Returns

This question tests your ability to calculate average and marginal product, and to recognize when diminishing returns begin.

Key Terms and Formulas:

• Average Product of Labor (APL): $APL = \frac{\text{Total Output}}{\text{Number of Workers}}$

• Marginal Product of Labor (MPL): $MPL = \text{Change in Output} / \text{Change in Labor}$

• Law of Diminishing Returns: Adding more of a variable input to a fixed input will eventually cause the marginal product to decline.

Step-by-Step Guidance

1. For APL, divide total output by the number of workers for the specified case.

2. For MPL, subtract the previous total output from the current total output when an additional worker is hired.

3. To find when diminishing returns set in, look for the point where MPL starts to decrease as more workers are added.

4. Use the given data and formulas to fill in the missing values.

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Q8. Fill in the marginal product of labor for flower production and identify when diminishing returns occur.

Background

Topic: Marginal Product and Diminishing Returns

This question tests your ability to calculate the marginal product of labor and recognize the onset of diminishing returns.

Key Terms and Formulas:

• Marginal Product of Labor (MPL): $MPL = \text{Change in Output} / \text{Change in Labor}$

• Law of Diminishing Returns: The principle that adding more of a variable input to a fixed input will eventually decrease the marginal product.

Step-by-Step Guidance

1. For each additional worker, subtract the previous output from the current output to find MPL.

2. Fill in the MPL values for each row in the table.

3. Identify the point where MPL starts to decrease, indicating diminishing returns.

4. Use the definition of diminishing returns to select the correct answer from the options provided.

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Q9. Calculate the marginal product of labor for Charles's lawn-mowing company and explain why MPL might increase.

Background

Topic: Marginal Product and Division of Labor

This question tests your understanding of how marginal product can change as more workers are hired, and the reasons for these changes.

Key Terms and Formulas:

• Marginal Product of Labor (MPL): $MPL = \text{Change in Output} / \text{Change in Labor}$

• Division of Labor: Specialization of tasks can increase productivity.

Step-by-Step Guidance

1. Calculate the MPL for each worker by finding the difference in output as each new worker is hired.

2. Observe if MPL increases as more workers are added, and consider if this is due to division of labor or specialization.

3. Recall that the law of diminishing returns typically applies in the short run, when at least one input is fixed.

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Q10. When do diminishing returns in the production of pizzas start?

Background

Topic: Law of Diminishing Returns

This question asks you to identify the point at which the marginal product of labor begins to decrease as more workers are hired.

Key Terms and Formulas:

• Marginal Product of Labor (MPL): $MPL = \text{Change in Output} / \text{Change in Labor}$

• Diminishing Returns: Occur when MPL decreases as more of a variable input is added to a fixed input.

Step-by-Step Guidance

1. Look at the MPL values in the table as each worker is added.

2. Identify the first instance where MPL decreases compared to the previous worker.

3. Select the answer choice that corresponds to this point.

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Q11. What is Susan's average total cost of production for pizzas?

Background

Topic: Average Total Cost (ATC)

This question tests your ability to calculate average total cost given total cost and output.

Key Terms and Formulas:

• Average Total Cost (ATC): $ATC = \frac{\text{Total Cost}}{\text{Quantity Produced}}$

Step-by-Step Guidance

1. Identify the total cost and the number of pizzas produced.

2. Divide the total cost by the number of pizzas to find ATC.

3. Round your answer to two decimal places as instructed.

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Q12. What is Susan's marginal cost of producing the 1,001st pizza?

Background

Topic: Marginal Cost (MC)

This question tests your ability to calculate the marginal cost, which is the change in total cost when one more unit is produced.

Key Terms and Formulas:

• Marginal Cost (MC): $MC = \frac{\text{Change in Total Cost}}{\text{Change in Quantity}}$

Step-by-Step Guidance

1. Find the change in total cost when output increases from 1,000 to 1,001 pizzas.

2. Since the change in quantity is 1, the marginal cost is simply the difference in total cost.

3. Compare the marginal cost to the average total cost to determine if ATC is rising or falling.

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Q13. Calculate variable cost, average variable cost, and average fixed cost for tennis ball production.

Background

Topic: Cost Calculations in Production

This question tests your ability to distinguish between fixed and variable costs, and to calculate average costs at a given output level.

Key Terms and Formulas:

• Variable Cost (VC): $VC = \text{Total Cost} - \text{Fixed Cost}$

• Average Variable Cost (AVC): $AVC = \frac{VC}{\text{Output}}$

• Average Fixed Cost (AFC): $AFC = \frac{\text{Fixed Cost}}{\text{Output}}$

• Average Total Cost (ATC): $ATC = \frac{\text{Total Cost}}{\text{Output}}$

Step-by-Step Guidance

1. Subtract fixed cost from total cost to find variable cost.

2. Divide variable cost by output to find AVC.

3. Divide fixed cost by output to find AFC.

4. Consider how the difference between ATC and AVC changes as output increases.

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Q14. Draw the average variable cost curve for hotdog production given ATC and AFC curves.

Background

Topic: Cost Curves in Production

This question tests your understanding of the relationship between average total cost, average fixed cost, and average variable cost.

Key Terms and Formulas:

• Average Total Cost (ATC): $ATC = AFC + AVC$

• Average Variable Cost (AVC): $AVC = ATC - AFC$

Step-by-Step Guidance

1. For each quantity, subtract AFC from ATC to find AVC.

2. Plot the AVC values for each quantity on the graph as instructed.

3. Label the curve appropriately.

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Q15. Does moving from text messaging to email at Segment.com represent positive or negative technological change? What about higher salaries for engineers?

Background

Topic: Technological Change and Cost

This question tests your understanding of what constitutes technological change and how changes in input costs affect production technology.

Key Terms:

• Technological Change: A change in the ability to produce output with a given set of inputs.

• Positive Technological Change: More output from the same inputs or same output at lower cost.

• Negative Technological Change: Less output from the same inputs or same output at higher cost.

Step-by-Step Guidance

1. For the switch from text messaging to email, consider if this change increases or decreases productivity or output per input.

2. For higher salaries, determine if this is a change in technology or simply a change in input prices.

3. Choose the answer that best matches the definitions above.

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Q16. What is the marginal cost of producing the 200th pizza?

Background

Topic: Marginal Cost Calculation

This question tests your ability to calculate the marginal cost of production using total cost data for different output levels.

Key Terms and Formulas:

• Marginal Cost (MC): $MC = \frac{\text{Change in Total Cost}}{\text{Change in Output}}$

Step-by-Step Guidance

1. Find the total cost before and after producing the 200th pizza.

2. Calculate the change in total cost and the change in output.

3. Divide the change in total cost by the change in output to find MC.

4. Compare your result to the answer choices provided.

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