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ECO101 Problem Set 7 Questions Firm Costs

This document provides the questions for a problem set on firm costs for a microeconomics course. It includes questions about calculating different cost metrics like total, average, and marginal costs based on production information. It also asks students to classify costs as fixed or variable and determine breakeven points for businesses based on their cost structures. There are 6 main sections covering topics like cost curves, business costs and revenues, and profit calculations.

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Eshika Sehgal
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122 views2 pages

ECO101 Problem Set 7 Questions Firm Costs

This document provides the questions for a problem set on firm costs for a microeconomics course. It includes questions about calculating different cost metrics like total, average, and marginal costs based on production information. It also asks students to classify costs as fixed or variable and determine breakeven points for businesses based on their cost structures. There are 6 main sections covering topics like cost curves, business costs and revenues, and profit calculations.

Uploaded by

Eshika Sehgal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ECO 101H1: Principles of Microeconomics Prof.

Freitas, University of Toronto

Problem set: Firm Costs


Questions

For this Problem Set, I will use the following abbreviations

TPL Total Product of Labor (i.e. output) AVC Average Variable Cost VC Variable Cost

MPL Marginal Product of Labor MC Marginal Cost ATC Average Total Cost

FC Fixed Cost TC Total Cost AFC Average Fixed Cost

1) Consider a firm in the short run. The only variable input is labor that can be hired at a wage rate of $50 per
worker. The output produced by workers is summarized in the table below. Fixed cost is $500.
No. of workers TPL MPL FC AFC VC AVC TC ATC MC

0 0 $500

1 5.3

2 14.8

3 24.8

4 33.8

5 39.8

6 44.3

7 48.1

8 50.5

9 52.4

10 53.4

1a) Complete the table with short-run costs.


1b) Over what range of labor will you have increasing M P L?

1c) After which labor unit does diminishing M P L set in?


2) Your friend currently work in the construction industry. Her hourly wage is $20 and she can work as many
hours as she wants. She is considering setting up an Etsy shop and hires you to her her figure out her costs.
She is going to use her savings ($5,000) to buy a machine to print stuff on T-shirts. At the end of the year she
can sell the machine on Kijiji for $4000. The cost of materials for each printed T-Shirt is $6 (blank T-shirt,
ink etc.). She also takes 12 mins of her time for each T-shirt (run the machine, process and mail the order,
communicate with buyer etc.). She is going to pay herself $15 an hour. Every T-shirt costs $2 to mail and
she needs to pay Etsy $0.2 per unit listing fee and 5% of revenue as a transaction fee.
2a) Your first task is to calculate all her (economic) costs and classify them into fixed and variable costs.

2b) If the demand for construction workers rises in Toronto. How does this affect your friend’s costs?
2c) If the stock market does worse than expected and mutual funds have a low return, what happens to your
friend’s costs?
2d) Suppose instead of the machine described above, she buys a different machine, which costs $6000 and can be
resold for $2000 at the end of the year. The benefit is that it reduces the time per T-shirt to 6 mins each.
What are her costs with this machine?

052020 1 of 2 Problem Set Questions


ECO 101H1: Principles of Microeconomics Prof. Freitas, University of Toronto

3) We look at a set of “standard” curves in lecture and in the textbook. However, the shape of the curves depend
on what the costs are which usually depends on the technology used to convert inputs to output. Here are
some examples, where the curves may differ from the standard ones in the textbook but using the information
on the technology, you should be able to determine what they look like.
3a) You develop a series of video lectures on a topic that you care about. It took time and a camera to create
them, but once made, you can use them in your online course for no extra cost per view. What are your cost
curves?
3b) Ally is a kid in your neighborhood who hires other kids to go grocery shopping for older people in the area.
The only input her company uses is labor. What do her cost curves look like?
3c) Suppose firm marginal costs increase at a constant rate, (e.g. M C = 2q). What do cost curves look like?

3d) Birdy develop an app that took her time. She put it on the Apple store and get charged $0.5 per download.
What do her cost curves look like?
4) You are currently making $80,000 per year as an economic consultant. You want to leave to open up a service
that matches donors to projects that need funding in the developing world. To do so, you need (1) your time
and (2) computer equipment worth $10,000. You have more than $10,000 in the bank, and earn 5% per year
on the money you have in the bank.
4a) Assume that after one year of using the computer, you can resell it for $10,000. At what level of yearly revenues
do you earn zero economic profits?
4b) Assume instead that after one year of using the computer equipment , you can resell it but only for $4,000.
At what level of revenues do you earn zero economic profits?
4c) If you paid yourself $30,000 a year in your new business. At what level of yearly consulting revenues do you
earn zero economic profits?
4d) Suppose you the computer equipment is worth $4000 at the end of the year. But you realize that your technical
skills are limited and you need to hire a part-time computer programmer at a cost of $28,000. At what level
of yearly revenues do you earn zero economic profits?
5) You are moving to Manitoba to do field research for one year. You need a car for your job.
5a) If you rent a car, you sign a one year contract and have to pay $1000 a month. What is your annual cost if
you rent a car? What type of cost is it, fixed or variable?

5b) Your other option is to buy a car. If the sticker price of the car you are considering is $25,000 and that is the
only option, how would you calculate the cost of the car for a year? What type of cost is it, fixed or variable?
6) Total costs are T C(q) = 400 + q 2 .Marginal costs are M C(q) = 2q.
6a) What quantity minimizes average total costs (ATC)?

6b) At what quantity does MC = AVC?

052020 2 of 2 Problem Set Questions

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