Seminar Six

AgendaCourse Issues and QuestionsReview of Chapter Eight ConceptsHomework ProblemsQuestions?

What is the purpose of What is the purpose of this Unit?this Unit?

The purpose of this The purpose of this chapter is to study chapter is to study production and its production and its

relationship to various relationship to various types of coststypes of costs

The motivation for The motivation for business decisions is business decisions is profit maximizationprofit maximization

Any resource for Any resource for which the quantity which the quantity

cannot change cannot change during the period during the period

of time under of time under considerationconsideration

Any resource for Any resource for which the quantity which the quantity can change during can change during the period of time the period of time

under under considerationconsideration

A period of time so A period of time so short that there is short that there is at least one fixed at least one fixed

inputinput

A period of time so A period of time so long that all inputs long that all inputs

are variableare variable

The relationship The relationship between the between the

maximum amounts maximum amounts of outputs a firm can of outputs a firm can produce and various produce and various quantities of inputsquantities of inputs

The principle that beyond The principle that beyond some point the marginal some point the marginal

product decreases as product decreases as additional units of a additional units of a variable resource are variable resource are added to a fixed factoradded to a fixed factor

Marty’s Frozen Yogurt is a small shop that sells cups of frozenyogurt in a university town. Marty owns three frozen-yogurtmachines. His other inputs are refrigerators, frozen-yogurt mix,cups, sprinkle toppings, and, of course, workers. He estimatesthat his daily production function when he varies the numberof workers employed (and at the same time, of course, yogurtmix, cups, and so on) is as shown in the accompanying table.

Chapter 12 #3

Marty pays each of his workers $80 per day. Thecost of his other variable inputs is $0.50 per cup of yogurt. Hisfixed cost is $100 per day.

a. What is Marty’s variable cost and total cost when he produces110 cups of yogurt? 200 cups? Calculate variableand total cost for every level of output given in Problem 2.b. Draw Marty’s variable cost curve. On the same diagram,draw his total cost curve.

c. What is the marginal cost per cup for the first 110 cups ofyogurt? For the next 90 cups? Calculate the marginal costfor all remaining levels of output.

Chapter 12 #3

a. For each of the given levels of output, calculate the averagefixed cost (AFC), average variable cost (AVC), andaverage total cost (ATC) per cup of frozen yogurt.

b. On one diagram, draw the AFC, AVC, and ATC curves.

c. What principle explains why the AFC declines as outputincreases? What principle explains why the AVC increasesas output increases? Explain your answers.

d. How many cups of frozen yogurt are produced when averagetotal cost is minimized?

Chapter 12 #4

Chapter 12 #4

Figure 5.1: Average Total and Marginal Costs

1.1. Why does the marginal cost curve Why does the marginal cost curve intersect the average variable and intersect the average variable and average total cost curves at their average total cost curves at their

respective minimum points?respective minimum points?

2.2. If a firm wished to minimize its cost If a firm wished to minimize its cost of production then what output level of production then what output level

should it produce?should it produce?

3.3. How can the extent to which How can the extent to which economies or diseconomies of scale economies or diseconomies of scale

are experienced help us to predict the are experienced help us to predict the size and number of real-world firms size and number of real-world firms

in an industry?in an industry?

4. Some companies advertise: "We deal in 4. Some companies advertise: "We deal in high volume and pass our savings on to high volume and pass our savings on to you in the form of lower prices." How you in the form of lower prices." How

could this be?could this be?5. Many people search out and purchase 5. Many people search out and purchase

"bargains" at garage and yard sales. "bargains" at garage and yard sales. What are some implicit costs associated What are some implicit costs associated

with this type of shopping?with this type of shopping?6. Is the "best" quantity of workers to hire 6. Is the "best" quantity of workers to hire

where the marginal productivity of the where the marginal productivity of the last worker employed is the greatest last worker employed is the greatest

(which implies an output level in which (which implies an output level in which the marginal cost of producing the marginal cost of producing

additional units is the cheapest)?additional units is the cheapest)?7. Why do marginal costs of production 7. Why do marginal costs of production

rise?rise?

Questions?Questions?