Chapter 1. WIO_Krugman_Chapter11

Step 1

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

Question

The accompanying table shows a car manufacturer’s total cost of producing cars.

Quantity of Cars TC
0 $500,000
1 540,000
2 560,000
3 570,000
4 590,000
5 620,000
6 660,000
7 720,000
8 800,000
9 920,000
10 1,100,000
Table

What is this manufacturer’s fixed cost?

Fixed cost: $blmKbQ8CHb/1bYSi

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Correct! For further review see section “From the Production Function to Cost Curves.” (Please link to in the ebook)
Incorrect, recall that the firm incurs a fixed cost even when production is zero. When the quantity of cars is zero, the total cost will equal the fixed cost. Using the table above this means the fixed cost is $500,000. For further review see section “From the Production Function to Cost Curves.” (Please link to in the ebook)
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Step 2

Question

Complete the table by calculating the variable cost (VC) for each level of output.

Quantity of Cars TC Variable Cost (VC)
0 $500,000 $1Wh3cvJ2xF4=
1 540,000 $RQ62JgWrSebu+Y4N
2 560,000 $SZl3nVwqFIl28dTv
3 570,000 $hDsxcTfYis6ty3Ne
4 590,000 $7fCtxAy60pxJbtwd
5 620,000 $cNCKvnT9uUNWHRXQ
6 660,000 $8sE75V97bqGHEyO5
7 720,000 $um8YCzGZH7b4xsMl
8 800,000 $RbLL6lNtMDwlZjZl
9 920,000 $Tl7FD7+2+2Jxh+CY
10 1,100,000 $OsLQQj9gWCvyJ7yi
Table
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Recall that the variable cost is the difference between total cost and fixed cost. In part A you found fixed costs were $500,000. This is also the level of total cost when output is zero. To find variable cost subtract $500,000 from total cost for each level of output. For example, when the company produces 5 cars, variable costs are $620,000 - $500,000 = $120,000. For further review see section “From the Production Function to Cost Curves.” (Please link to in the ebook)
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Step 3

Question

Complete the table: for each level of output except zero output, calculate the average variable cost (AVC), average total cost (ATC), and average fixed cost (AFC) (please round your answer to the nearest whole number).

Quantity of Cars TC Variable Cost (VC) Average variable cost (AVC) Average total cost (ATC) Average fixed costs (AFC)
0 $500,000 0 - - -
1 $500,000 40,000 RQ62JgWrSebu+Y4N M1MTx8WPCjbKS3xv 3fHIkRbgF5l4/+aD
2 560,000 60,000 017qZ55ypTDUVx66 w3u/5hgG8VW3twPZ 3k01W77IdowyI1bs
3 570,000 70,000 ep5tibT+C3OMF/Oo 8Z3MziaiHR7L9MhY xX/eu6UEm4IJrIL2
4 590,000 90,000 dVrVqtiNwmMXpsrR +wc+svgvgPm+ELw0 gqLh4R8amgOsTihw
5 620,000 120,000 9dCBAx9jNxkjY3bN sTPUTtpbV5sDC0pe FrRW26Em/hdRFfCL
6 660,000 160,000 X+S6BtyoLLU0pLE6 PcrC99aT6W1acJLY 4dBhLFwjG17EEsam
7 720,000 220,000 qhx9Q4LJleS5LvAK 2iJyBa9/nsXBF09K x77nYxORz+QHsRoR
8 800,000 300,000 JQfSCYtjfPcfkApa FrRW26Em/hdRFfCL mqcVnAiwYF2V+l2p
9 920,000 420,000 W7l2+UWRszECMK2J JIgGP0EGCxpZMF9J UStynm9xwp6pWgZr
10 1,100,000 600,000 SZl3nVwqFIl28dTv PcrC99aT6W1acJLY ot3oCc1tW2P7T4tU
Table
3
Average variable cost is VC/Q, for example the AVC for 4 cars is $90,000/4 = $22,500. Average total cost is TC/Q, for example the ATC for 6 cars is $660,000/6 = $110,000. Average fixed cost is FC/Q. Remember fixed costs are $500,000. For 5 cars AFC are $500,000/5 = $100,000. You should make notice that AFC are always decreasing as quantity increases. For further review see section “Two Key Concepts: Marginal Cost and Average Cost.” (Please link to in the ebook)
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Step 4

Question

Complete the table by calculating the marginal cost (VC) for each level of output.

Quantity of Cars TC Marginal Cost (CC)
0 $500,000 -
1 540,000 RQ62JgWrSebu+Y4N
2 560,000 iJhDR+zyw6cq8i6C
3 570,000 chVLb6nAL5Dt+kbR
4 590,000 iJhDR+zyw6cq8i6C
5 620,000 017qZ55ypTDUVx66
6 660,000 RQ62JgWrSebu+Y4N
7 720,000 SZl3nVwqFIl28dTv
8 800,000 DLJrAA1sOwUc5p/S
9 920,000 cNCKvnT9uUNWHRXQ
10 1,100,000 A2t99PpEqV03U4ut
Table
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Recall that marginal cost is change in total cost divided by the change in quantity (MC = ΔTC/ΔQ). In this problem the change in quantity is always one which implies marginal cost will be the difference in total cost as output increases by one unit. For example, as output increases from 1 to 2 cars, total costs increase from $540,000 to $560,000. The change in total costs are $20,000 which is also the marginal cost.. For further review see section “Two Key Concepts: Marginal Cost and Average Cost.” (Please link to in the ebook)
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Step 5

Question

On the diagram below label the manufacturer’s AVC, ATC, and MC curves.

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