QUESTIONS AND PROBLEMS

Check Your Understanding

Question 7.1

1. What is the difference between explicit and implicit costs? What is the difference between economic and accounting profits? Are these four concepts related? How?

Question 7.2

2. Why should sunk costs be ignored for decision making?

Question 7.3

3. How does the short run differ from the long run? Is the long run the same for all industries? Why or why not?

Question 7.4

4. Why should a firm never hire a worker when negative marginal returns set in?

Question 7.5

5. Why is the average fixed cost curve not U-shaped? Why does it not turn up as the average variable cost and average total cost curves do?

Question 7.6

6. What is the difference between marginal cost and average total cost?

Apply the Concepts

Question 7.7

7. If you work hard building your business and end up earning zero economic profit for the year, would this be considered a failed business to an economist? Why or why not?

Question 7.8

8. In order to take this class, you had to pay tuition, buy the textbook, and buy a new laptop. Which of these items (if any) would be considered a sunk cost? Explain your reasoning.

Question 7.9

9. The movie industry earns a substantial portion of its total revenues through Internet streaming and downloads. Although producing a movie can costs tens of millions of dollars, the marginal cost of producing another copy or download is practically nothing. For this industry, would short-run ATC and MC still be U-shaped? If not, what would these curves look like?

Question 7.10

10. List some of the reasons why the long-run average total cost curve has sort of a flat bowl shape. It declines early on, then is rather flat over a portion, and finally slopes upward.

Question 7.11

11. The Finger Lakes region in New York State produces wine. The climate favors white wines, but reds have been produced successfully in the past 15 years. Categorize the following costs incurred by one winery as either fixed or variable:

  1. the capital used to buy 60 acres of land on Lake Seneca

  2. the machine used to pick some varieties of grapes at the end of August and the beginning of September

  3. the salary of the chief vintner, who is employed year-round

  4. the wages paid to workers who bind the grape plants, usually in April, and usually over a period of 3 to 4 days

  5. the wages paid to the same workers who pick the grapes at the end of August or early September

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  6. the costs of the chemicals sprayed on the grapes in July

  7. the wages of the wine expert who blends the wine in August and September, after the grapes have been picked

  8. the cost of the building where wine tastings take place from April to October

  9. the cost of the wine used in the wine tasting

Question 7.12

12. If marginal cost is less than average total cost, are average total costs rising or falling? Alternatively, if marginal cost is more than average total cost, are average total costs rising or falling? Explain how this example might apply to a basketball player attempting to achieve a high average points per game.

In The News

Question 7.13

13. Fracking is the process by which oil is extracted from underground using a high-pressure water mixture. This procedure has led to accusations that it causes earthquakes as a result of the wastewater that is injected back underground. As a result, several cities and states have banned fracking operations, while others have proposed regulations on how fracking should be conducted. How do new regulations affect the costs of doing business? Do regulations represent a fixed or variable cost, or can they be both? Explain.

Question 7.14

14. Colorado was the first state to legalize recreational marijuana in 2012. Since then, several states have followed, leading to a boom in the number of growers and shops selling marijuana. A problem, however, is that federal law still prohibits the sale of marijuana, though in practice state laws have been respected. Still, many shop owners choose to conduct transactions only in cash to avoid leaving an evidence trail from credit card transactions, which reduces the risk of prosecution but raises the risk of theft or loss. With so much retail competition along with added risk, why do many choose to venture into this business?

Solving Problems

Question 7.15

15. Suppose you pay $10 to watch a movie at the local cineplex, and afterward you sneak into the next theater to watch a second movie without paying. What is your marginal cost of watching the second movie? What is the average cost of watching the two movies? After the movies, you go to the batting cages and stand in for two rounds of pitches, each round costing $2. What is your marginal cost of batting the second round? What is the average cost of batting two rounds?

WORK IT OUT | interactive activity

Question 7.16

16. Using the following table, answer the following questions.

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  1. Complete the table, filling in the answers for marginal and average products.

  2. Over how many workers is the firm enjoying increasing returns?

  3. At what number of workers do diminishing returns set in?

  4. Are negative returns shown in the table?

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USING THE NUMBERS

Question 7.17

17. According to By the Numbers, explain why a correlation exists between the costs of industrial robots and the productivity rate over the last 20 years.

Question 7.18

18. According to By the Numbers, between which 5 years from 2000 to 2015 did Internet flight bookings increase the most (by percentage of overall sales)? Between which 5 years from 2000 to 2015 did Internet flight check-ins increase the most (by percentage of overall check-ins)?