Answers-to-Chapter-13-que
Mankiw – Chapter 13
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. Farmer McDonald’s opportunity cost is $300, consisting of 10 hours of lessons at $20 an hour that he could have been earning plus $100 in seeds. His accountant would only count the explicit cost of the seeds ($100). If McDonald earns $200 from selling the crops, then
McDonald earns a $100 accounting profit ($200 sales minus $100 cost of seeds) but makes an economic loss of $100 ($200 sales minus $300 opportunity cost).
2. Farmer Jones’s production function is shown in Figure 1 and his total-cost curve is shown in
Figure 2. The production function becomes flatter as the number of bags of seeds increases because of the diminishing marginal product of seeds. The total-cost curve gets steeper as the amount of production increases. This feature is also due to the diminishing marginal product of seeds, since each additional bag of seeds generates a lower marginal product, and thus, the cost of producing additional bushels of wheat rises.
Figure 1
Figure 2
3. The average total cost of producing 5 cars is $250,000 / 5 = $50,000. Since total cost rose from $225,000 to $250,000 when output increased from 4 to 5, the marginal cost of the fifth car is $25,000.
The marginal-cost curve and the average-total-cost curve for a typical firm are shown in
Figure 3. They cross at the efficient scale because at low levels of output, marginal cost is below average total cost, so average total cost is falling. But after the two curves cross, marginal cost rises above average total cost, and average total cost starts to rise. So the point of intersection must be the minimum of average total cost.
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Chapter 13/The Costs of Production
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Figure 3
4. The long-run average total cost of producing 9 planes is $9 million / 9 = $1 million. The long-run average total cost of producing 10 planes is $9.5 million / 10 = $0.95 million. Since the long-run average total cost declines as the
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. Farmer McDonald’s opportunity cost is $300, consisting of 10 hours of lessons at $20 an hour that he could have been earning plus $100 in seeds. His accountant would only count the explicit cost of the seeds ($100). If McDonald earns $200 from selling the crops, then
McDonald earns a $100 accounting profit ($200 sales minus $100 cost of seeds) but makes an economic loss of $100 ($200 sales minus $300 opportunity cost).
2. Farmer Jones’s production function is shown in Figure 1 and his total-cost curve is shown in
Figure 2. The production function becomes flatter as the number of bags of seeds increases because of the diminishing marginal product of seeds. The total-cost curve gets steeper as the amount of production increases. This feature is also due to the diminishing marginal product of seeds, since each additional bag of seeds generates a lower marginal product, and thus, the cost of producing additional bushels of wheat rises.
Figure 1
Figure 2
3. The average total cost of producing 5 cars is $250,000 / 5 = $50,000. Since total cost rose from $225,000 to $250,000 when output increased from 4 to 5, the marginal cost of the fifth car is $25,000.
The marginal-cost curve and the average-total-cost curve for a typical firm are shown in
Figure 3. They cross at the efficient scale because at low levels of output, marginal cost is below average total cost, so average total cost is falling. But after the two curves cross, marginal cost rises above average total cost, and average total cost starts to rise. So the point of intersection must be the minimum of average total cost.
234
Chapter 13/The Costs of Production
235
Figure 3
4. The long-run average total cost of producing 9 planes is $9 million / 9 = $1 million. The long-run average total cost of producing 10 planes is $9.5 million / 10 = $0.95 million. Since the long-run average total cost declines as the