# Production Costs

Please refer attached file for better clarity of tables. Some of the expressions typed here may not be exactly same as in attached file.

(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 materials cost \$20,000 per year. Gomez 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. Gomez 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 accounting profits and economic profits for Gomez's pottery

(2)List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1,000 miles to Florida for spring break. Which costs-fixed, variable, or both- would you take into account in making your decision? Would any implicit costs be relevant? Explain.

(3)A firm has fixed costs of \$60 and variable costs as indicated in the table below. Complete the table. When finished, check your calculations.

Q TFC TVC TC=TFC+TVC AFC=TFC/Q AVC=TVC/Q ATC=TC/Q MC*
0 0
1 45
2 85
3 120
4 150
5 185
6 225
7 270
8 325
9 390
10 465

a.Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the total variable-cost and total cost curves.
b.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.
c.Explain how the locations of each of the four curves 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)In the table below you will find a schedule of a firm's fixed cost and variable cost. Complete the table by computing total cost, average fixed cost, average variable cost, average total cost, and marginal cost.

Q TFC TVC TC AFC AVC ATC MC
0 \$100 \$0
1 100 100
2 100 180
3 100 240
4 100 320
5 100 440
6 100 600
7 100 800
8 100 1040
9 100 1340
10 100 1800

(5)What effect would each of the following have on the short-run average and marginal costs of an auto dealership: (a) auto mechanics receive a 10% wage increase; (b) property taxes decrease; (c) auto dealers institute a one-time only promotional campaign?

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#### Solution Preview

... 145 30.0 42.5 72.5 40.0
3 60 120 180 20.0 40.0 60.0 35.0
4 60 150 210 15.0 37.5 52.5 30.0
5 60 185 245 12.0 37.0 49.0 35.0
6 60 225 285 10.0 37.5 47.5 40.0
7 60 270 330 8.6 38.6 47.1 45.0
8 60 325 385 7.5 40.6 48.1 55.0
9 60 390 450 6.7 43.3 50.0 65.0
10 60 465 525 6.0 46.5 52.5 75.0

MC*=Change in Total Cost/Change in output

(a) Graph total fixed cost, total varable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the variable-cost and total-cost curves.

Refer the above graph, TFC is straight line while the TVC and TC curves slope
upward at a decreasing rate because marginal return are increasing in this
region. The slopes of the curves then increase at an increasing rate as
diminishing marginal returns occur.

(b) Graph AFC, AVC ATC and MC. Explain the derivation and shape of each of these four curves and their relationshops to one another. Specifically, explain in nintechnical terms why the MC curve intersects both the AVC and the ATC curves at their minimum points.

See the graph. AFC is decreasing continuously as fixed ...