# Economics (McConnell), 18th Edition

## Chapter 8: The Costs of Production

### Key Questions

1. Gomez runs a small pottery firm. He hires one helper at \$12,000 per year, pays annual rent of \$5,000 for his shop, and spends \$20,000 per year on materials. He has \$40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him \$4,000 per year if alternatively invested. He has been offered \$15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth \$3,000 per year. Total annual revenue from pottery sales is \$72,000. Calculate the accounting profit and the economic profit for Gomez's pottery firm.

2. Complete the table directly below by calculating marginal product and average product. Plot total, marginal, and average product and explain in detail the relationship between each pair of curves. Explain why marginal product first rises, then declines, and ultimately becomes negative. What bearing does the law of diminishing returns have on short-run costs? Be specific. "When marginal product is rising, marginal cost is falling. And when marginal product is diminishing, marginal cost is rising." Illustrate and explain graphically.

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3. A firm has fixed costs of \$60 and variable costs as indicated in the table at the bottom of this page. Complete the table and check your calculations by referring to question 4 at the end of Chapter 9.

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1. Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the variable-cost and total-cost curves.
2. Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and their relationships to one another. Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and ATC curves at their minimum points.
3. Explain how the locations of each curve graphed in question 7b would be altered if (1) total fixed cost had been \$100 rather than \$60, and (2) total variable cost had been \$10 less at each level of output.

4. Use the concepts of economies and diseconomies of scale to explain the shape of a firm's long-run ATC curve. What is the concept of minimum efficient scale? What bearing can the shape of the long-run ATC curve have on the structure of an industry?

Chapter 08 Key Question Solutions (179.0K)