Solutions to End-of-Chapter Exercises

Technology: An Economic Definition

11.1 Learning Objective: Define technology and give examples of
technological change.

Review Questions
1.1

Technology is the process a firm uses to turn inputs into outputs of goods and services.
Technological change is a change in the ability of a firm to produce a given level of
output with a given quantity of inputs.

1.2

Technological change could be negative, for instance, when a natural disaster destroys
factories, as happened as a result of the earthquake and tsunami that hit Japan in 2011, or
when a firm hires less-experienced workers. In these cases, the firm would produce a
lower level of output with the same quantity of inputs.

Problems and Applications

1.3

You should disagree with the statement because firms can experience technological
change in the production of existing products, not just in the introduction of new
products. Examples include the firms managers rearranging the flow of work on a
factory floor or the layout of a retail store, thereby increasing production and sales,
retraining workers, or installing faster or more reliable machinery or equipment.

1.4

(b), (c), and (d) are examples of positive technological change because they enable a firm
to produce more output with the same quantity of inputs. Choice (a) describes a change in
production costs that is the result of a change in the price of an input, not a change in
technology. Choice (e) is not an example of technological change because the same
quantity of inputs is used to produce the same quantity of output.

1.5

You should disagree because the statement is incorrect. The firms can now produce more
output (greater sales) with fewer inputs (fewer trucks). Therefore, this is indeed an
example of technological change.

The Short Run and the Long Run in Economics

11.2 Learning Objective: Distinguish between the economic short run and the
economic long run.

Review Questions
2.1

In the short run, at least one of the firms inputs is fixed, but in the long run, the firm can
vary all of its inputs, adopt new technology, and change the size of its physical plant. The
amount of time that it takes to move from the short run to the long run varies from firm to
firm.

2.2

Fixed costs are costs that remain constant as output changes, and variable costs are costs
that change as output changes. An example of a fixed cost is the lease payment for a
factory or retail store; an example of a variable cost is the cost of raw materials.

2.3

Explicit costs involve spending money. Implicit costs are nonmonetary opportunity costs,
such as the wages the owner of a firm could have earned if he or she worked for someone
else.

2.4

The production function shows the relationship between the inputs employed by a firm
and the maximum output it can produce with those inputs. The short-run production
function holds constant fixed inputs (such as the number of ovens in Jills pizza
restaurant in the example in the chapter).

Problems and Applications

2.6

Wage costs are variable if firms increase the number of workers they hire as they increase
output. If a publishing company decides to increase the quantity produced of any book it
publishes, it does not need to hire any more editors, designers, or other employees
(although the firm that actually prints the books may have to). Even if the publishing
company decides to publish additional titles, it may not need to hire more editors or other
employees because these employees usually work on several titles at the same time. Only
if the company intends to significantly increase the number of titles it publishes will it
hire more employees. Therefore, publishing companies typically consider their wage
costs to be fixed costs, rather than variable costs. For many firms, the cost of utilities can
be a mixture of fixed and variable costs. For example, a store may keep its lights on and
its outdoor signs lighted day and night. The cost of the electricity to keep these lights on
would, therefore, be a fixed cost because the cost does not vary with the quantity of the
product sold. On the other hand, if, for example, the store sells photocopies, then the
more copies it sells, the more it runs its copy machines, and the more electricity it uses.
So that part of its electric bill is a variable cost

2.7

(a), (d), and (e) are fixed costs because they do not change as the quantity of pizzas
produced increases; (b) and (c) are variable costs because they increase as the quantity of
pizzas produced increases. The time period under consideration is important. In the long
run, all of these costs are variable.

11.3

The Marginal Product of Labor and the Average

Product of Labor
Learning Objective: Understand the relationship between the marginal
product of labor and the average product of labor.

Review Questions
3.1

Marginal product normally increases at first due to specialization and division of labor,
but it eventually decreases because of the law of diminishing returns. The amount of
capital per worker declines as more labor is hired to work with a fixed amount of capital.
Therefore, the marginal product of labor falls. When the marginal product of labor is
greater than the average product of labor, the average product of labor increases. When
the marginal product of labor is less than the average product of labor, the average
product of labor decreases. The marginal product of labor is equal to the average product
of labor when the average product of labor is at its maximum value.
3.2

The marginal product of labor initially increases, due to specialization and division of
labor, as the number of workers hired increases.

3.3

The law of diminishing returns is the principle that, at some point, adding more of a
variable input (for example, labor) to the same amount of a fixed input (such as capital)
will cause the marginal product of the variable input to decline. This principle doesnt
apply in the long run because, in the long run, none of the inputs are fixed; all inputs can
vary.

Problems and Applications

3.4

3.5

Quantity of
Workers

Total Output

Marginal Product of
Labor

Average Product of Labor

400

400

400

900

500

450

1,500

600

500

1,900

400

475

2,200

300

440

2,400

200

400

2,300

100

329

3.6

The students analysis is incorrect. The data in Table 11.3 represent the effects of
specialization and division of labor and the law of diminishing returns, rather than the
varying quality of the workers.

3.8

As long as Sallys GPA for a semester is below her cumulative GPA, her cumulative GPA
will fall. The current semesters GPA is her marginal GPA, while her cumulative GPA is
her average GPA. Even if her marginal GPA goes up, her average GPA will go down as
long as her marginal GPA is below her average GPA.

3.10

a.

AP = Q/L = 24/4 = 6 pizzas per worker

b. MP = Q/L = (28 24)/(5 4) = 4/1 = 4 pizzas per worker

c. If we add the marginal product of the second worker (6 pizzas) to the number of
pizzas produced when 1 worker is hired (5 pizzas), then the total number of pizzas
produced when 2 workers are hired is 6 pizzas + 5 pizzas = 11 pizzas.
d. The law of diminishing returns sets in when the marginal product of labor first starts
to fall; so in this case, it sets in with the fourth worker hired (where marginal product
falls to 5).

11.4

The Relationship between Short-Run Production and

Short-Run Cost
Learning Objective: Explain and illustrate the relationship between
marginal cost and average total cost.

Review Questions
4.1

Average total cost is total cost divided by the quantity of output produced; marginal cost
is the change in a firms total cost from producing one more unit of a good or service.

4.2

If the marginal product of labor is rising, it means that each additional worker is
contributing more additional output than the previous worker. As a result, the additional,
or marginal, cost of output must be falling because the additional output takes fewer
additional workers to produce. Marginal product and marginal cost are mirror images of
each other: When marginal product increases, marginal cost falls, and vice versa.

4.3

When marginal cost is below average total cost, marginal cost pulls average total cost
down, so we are on the downward-sloping section of the U-shaped average total cost
curve. When output expands enough, marginal cost rises to equal and then exceed
average total cost. When marginal cost is above average total cost, marginal cost pulls
average total cost up, so we are on the upward-sloping section of the U-shaped average
total cost curve. Therefore, at the point where marginal cost equals average total cost, the
average total cost curve stops sloping downward but hasnt begun sloping upwardthat
is, the average total cost curve is at its lowest point when the marginal cost curve equals
(or intersects) it.

Problems and Applications

4.5

Yes. As long as marginal cost is below average total cost, average total cost will be
decreasing, even if marginal cost is increasing.

4.6

a. No. In this case, average total cost is also always increasing.

b. As each unit costs an additional (marginal) cost of $5 to produce, average total cost
will also be $5 for each unit. The average cost curve and the marginal cost curve will
be a straight line parallel to the quantity axis at $5. Note that this result depends on the
assumption stated at the beginning of the problem that the firm has no fixed costs.

4.7

a.
Quantity
of Workers

Quantity
of Copies
per Day

Total
Cost

Average
Total
Cost

Fixed
Cost

Variable
Cost

Marginal
Cost

$40

$0

$40

600

40

40

80

$0.133

$0.067

1,100

40

80

120

0.109

0.080

1,500

40

120

160

0.106

0.100

1,800

40

160

200

0.111

0.133

2,000

40

200

240

0.120

0.200

2,100

40

240

280

0.133

0.400

b. The average total cost curve is U shaped; it falls initially and then rises. (Note that in
this example, we only get the U shape for the average total cost curve if we compute
average total cost to three decimal places. At two decimal places, the average total cost
of producing 1,100, 1,500, and 1,800 copies is $0.11; so the average total cost curve
will have a flat section.) The marginal cost curve, on the other hand, rises
continuously, rather than being U shaped.

4.8

Average total cost is total cost divided by total output. In this case, average total cost for
10,000 pizzas is $50,000/10,000 = $5.00. Marginal cost is the change in total cost divided
by the change in output. In this case, marginal cost from the additional pizza is $11/1 =
$11. As the graph shows, when average total cost is rising, marginal cost must be above
average total cost. Therefore, Jill is correct to say that her marginal cost must be
increasing.

4.9

Average total cost is total cost divided by total output. In this case, average total cost is
$75,002/20,001 = $3.75. Marginal cost is the change in total cost divided by the change
in output. In this case, marginal cost is $2/1 = $2. As the graphs show, when average total
cost is greater than marginal cost, marginal cost may be either increasing (graph (a)
shown below) or decreasing (graph (b) shown below). Therefore, Jill is wrong to say that
her marginal cost must be increasing because it may or may not be increasing.
a. In this case, Jills average total cost is above her marginal cost, and her marginal cost
is increasing.

b. In this case, Jills average total cost is above her marginal cost, and her marginal cost
is decreasing.

11.5

Graphing Cost Curves

Learning Objective: Graph average total cost, average variable cost,
average fixed cost, and marginal cost.

Review Questions
5.1

The marginal cost curve intersects the average variable cost curve and the average total
cost curve at their minimum points.

5.2

The difference between average total cost and average variable cost is average fixed cost.
Average fixed cost decreases as output increases, so the difference between average total
cost and average variable cost must also continuously decrease. ATC = AVC + AFC, so
ATC AVC = AFC. As AFC continuously decreases, so does ATC AVC.

Problems and Applications

5.3

a. Variable cost = total cost fixed cost. So, $30,000 $10,000 = $20,000.
b. AVC = VC/Q = $20,000/10,000 = $2; AFC = FC/Q = $10,000/10,000 = $1.
c. The gap must get smaller as output rises because ATC = AVC + AFC and AFC falls as
output rises. So, the dollar difference between ATC and AVC is greater when the output
of tennis balls is 10,000.

5.7

a.
b.
c.
d.

5.9

a.
Marginal cost, average variable cost, and average total cost
average fixed cost is unaffected.
b. Marginal cost, average variable cost, and average total cost will all
fixed cost is unaffected.
c. Average fixed cost and average total cost will decrease; marginal
variable cost will be unaffected.
d. Average fixed cost and average total cost will increase; marginal
variable cost will be unaffected.

11.6

$15
Total cost = ATC Q = $30 1,000 = $30,000.
Variable cost = AVC Q = $20 1,000 = $20,000.
Fixed cost = Total cost Variable cost = $30,000 $20,000 = $10,000.
will all increase;
increase; average
cost and average
cost and average

Costs in the Long Run

Learning Objective: Understand how firms use the long-run average

cost curve in their planning.

Review Questions
6.1

In the short run, Total cost = Variable cost + Fixed cost; but in the long run, Total cost =
Variable cost because there are no fixed costs in the long run.

6.2

Minimum efficient scale is the lowest level of output at which all economies of scale
have been exhausted. In other words, minimum efficient scale is where the long-run
average cost curve stops sloping downward. In the long run, firms that dont reach
minimum efficient scale will have higher average costs than competitors that do reach
minimum efficient scale, so they will probably be driven out of business. (However, firms
that justify selling at premium prices due to product differentiation can survive. The
textbook discusses this last point in Chapter 13.)

6.3

Economies of scale exist when a firms long-run average costs fall as the firm increases
output. Firms may experience economies of scale because: (1) a firms technology may
allow it to increase production with a smaller proportional increase in at least one input;
(2) both workers and managers can become more specialized as output expands; (3) large
firms may be able to purchase inputs at lower costs than smaller firms can; and (4) as a
firm expands, it may be able to borrow money at a lower interest rate, thereby lowering
its costs.

6.4

Diseconomies of scale exist when a firms long-run average costs rise as the firm
increases output. Diseconomies of scale eventually arise because managing a store or
factory above a certain size is simply too complicated.

6.5

Because short-run average cost includes at least one input that is fixed in quantity, it can
never be less than long-run average cost (where there are no fixed inputs or fixed costs).

Problems and Applications

6.7

a.

Jills average total cost will be lower with a smaller restaurant.

b. Jills average total cost will be lower with a larger restaurant.

c. As we can see in Figure 11.6 in the text, economies of scale often take the form of a
larger store or restaurant allowing for lower average cost for a large quantity, but
actually higher average total cost for a small quantity. The larger restaurant may use
larger ovens, more tables, or other capital that isnt efficiently used if Jill is only able
to sell a smaller quantity of pizzas.