You are the chief financial officer for a firm that sells digital music players. Your firm has the following average-total-cost schedule:

$$\begin{array}{lc} \text{ Quantity } & \text{ Average Total Cost } \\ \hline 600 \text{ players } & \$ 300 \\ 601 & 301 \end{array}$$

Your current level of production is $600$ devices, all of which have been sold. Someone calls, desperate to buy one of your music players. The caller offers you $\$ 550$ for it. Should you accept the offer? Why or why not?

Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus's output in a given day:

$$\begin{array}{cccccc} &&&\text{Average}\\ &\text{Marginal} & \text{Total} & \text{Total} & \text{Marginal} \\ \text{Workers} & \text{Output} & \text{Product} & \text{Cost} & \text{Cost} & \text{Cost} \\ \hline 0 & 0 & & - & - & \\ 1 & 20 & - & - & - & - \\ 2 & 50 & - & - & - & - \\ 3 & 90 & - & - & - & - \\ 4 & 120 & - & - & - & - \\ 5 & 140 & - & - & - & - \\ 6 & 150 & - & - & -& - \\ 7 & 155 && - & - & \end{array}$$

a. Fill in the column of marginal products. What pattern do you see? How might you explain it?

b. A worker costs $\$ 100$ a day, and the firm has fixed costs of $\$ 200$. Use this information to fill in the column for total cost.

c. Fill in the column for average total cost. (Recall that $A T C=T C / Q$.) What pattern do you see?

d. Now fill in the column for marginal cost. (Recall that $M C=\triangle T C / \triangle Q$ ) What pattern do you see?

e. Compare the column for marginal product and the column for marginal cost. Explain the relationship.

f. Compare the column for average total cost and the column for marginal cost. Explain the relationship.

Consider the following cost information for a pizzeria:

$$\begin{array}{lcc} \text { Quantity } & \text { Total Cost } & \text { Variable Cost } \\ \hline 0 \text { dozen pizzas } & \$ 300 & \$ 0 \\ 1 & 350 & 50 \\ 2 & 390 & 90 \\ 3 & 420 & 120 \\ 4 & 450 & 150 \\ 5 & 490 & 190 \\ 6 & 540 & 240 \end{array}$$

Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also, calculate the marginal cost per dozen pizzas using the information on variable cost. What is the relationship between these sets of numbers? Explain.

Consider the following cost information for a pizzeria:

$$\begin{array}{lcc} \text{Quantity} & \text{Total Cost} & \text{Variable Cost} \\ \hline 0 \text{ dozen pizzas } & \$ 300 & \$ 10 \\ 1 & 350 & 50 \\ 2 & 390 & 90 \\ 3 & 420 & 120 \\ 4 & 450 & 150 \\ 5 & 490 & 190 \\ 6 & 540 & 240 \end{array}$$

a. What is the pizzeria's fixed cost?

b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also, calculate the marginal cost per dozen pizzas using the information on variable cost. What is the relationship between these sets of numbers? Comment.

The city government is considering two tax proposals:

• A lump-sum tax of $\$ 300$ on each producer of hamburgers.
• A tax of $\$ 1$ per burger, paid by producers of hamburgers.

Which of these same four curves would shift as a result of the per-burger tax? Why? Show this in a new graph. Label the graph as precisely as possible.

Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs:

Quantity of houses painted per month 1 2 3 4 5 6 7

Variable costs$10 $20$40 $80$160 $320$640

Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company?

Your cousin Vinnie owns a painting company with fixed costs of $\$ 200$ and the following schedule for variable costs: QUANTITY OF HOUSES PAINTED PER MONTH

$$\begin{array}{ccccccc} \hline &1 & 2 & 3 & 4 & 5 & 6 & 7 \\ \text { Variable costs } &\$ 10 & \$ 20 & \$ 40 & \$ 80 & \$ 160 & \$ 320 & \$ 640 \end{array}$$

Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company

When conducting a financial analysis of a firm, financial analysts:

a. cannot use accounting information as it is historical.
b. rely solely on accounting information.
c. frequently use accounting information.
d. ignore accounting information but do use marketing information.
e. assume the future will be a repeat of the past as reflected in the firm’s accounting reports.

Jane's Juice Bar has the following cost schedules:

$$\begin{array}{lcc} \text { Quantity } & \text { Variable Cost } & \text { Total Cost } \\ \hline 0 \text { vats of juice } & \$ \quad 0 & \$ 30 \\ 1 & 10 & 40 \\ 2 & 25 & 55 \\ 3 & 45 & 75 \\ 4 & 70 & 100 \\ 5 & 100 & 130 \\ 6 & 135 & 165 \end{array}$$

Calculate average variable cost, average total cost, and marginal cost for each quantity.

Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her$50,000 per year job as an accountant.

Define opportunity cost

A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:

$$\begin{aligned} &\begin{array}{lc} &\text { Quantity of Fish }\\ \text { Hours } & \text { (in pounds) } \\ \hline 0 \text { hours } & 0 \mathrm{lb} . \\ 1 & 10 \\ 2 & 18 \\ 3 & 24 \\ 4 & 28 \\ 5 & 30 \end{array} \end{aligned}$$

Use these data to graph the fisherman's production function. Explain its shape.

Compare the following two pairs of goods:

• Coke and Pepsi
• Skis and ski bindings

In which case do you expect the indifference curves to be fairly straight? In which case do you expect the indifference curves to be very bowed?

A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:

$$\begin{array}{lc} & \text{Quantity of Fish} \\ \text{Hours} & \text{ (in pounds) } \\ \hline 0 \text{ hours } & 0 \text{ lb } \\ 1 & 10 \\ 2 & 18 \\ 3 & 24 \\ 4 & 28 \\ 5 & 30 \end{array}$$

a. What is the marginal product of each hour spent fishing?

b. Use these data to graph the fisherman's production function. Explain its shape.

c. The fisherman has a fixed cost of $\$ 10$ (his pole). The opportunity cost of his time is $\$ 5$ per hour. Graph the fisherman's total-cost curve. Explain its shape.

This chapter discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost. Fill in the type of cost that best completes each sentence: a. What you give up for taking some action is called the _____. b. ______ is falling when marginal cost is below it and rising when marginal cost is above it. c. A cost that does not depend on the quantity produced is a(n) ______. d. In the ice-cream industry in the short run, _______ includes the cost of cream and sugar but not the cost of the factory. e. Profits equal total revenue minus ______. f. The cost of producing an extra unit of output is the _______.