CHAPTER 7
1.
Total revenue is $50,000 ($10 x 5,000). The opportunity cost of the capital is
10% of $100,000 annually or $10,000. Total cost, including opportunity costs,
is $45,000 for labor plus $10,000 for capital or $55,000. Profit is TR – TC or
$50,000 – $55,000 = –$5,000. The firm is suffering a $5,000 loss in economic
terms.
2. They
are not earning economic profits; they are not considering opportunity costs.
The opportunity cost of capital is 10 percent of $50,000 annually, or $5,000. Because
simple revenue minus cost yields an accounting profit of only $2,000, adding
$5,000 in opportunity cost means the firm is suffering losses of at least
$3,000. In addition, it is not considering the opportunity cost of its own
labor.
3. The size of the
theater is the fixed factor. Decisions include how to divide up the tickets,
what price to charge, what shows to put on, and what kind of stage sets to use.
All are constrained by the scale of the theater. In the long run, you might be
able to raise money and build or acquire a bigger theater. There is no fixed
factor in the long run; you can think big!
4. (a) The marginal product decreases as a single
variable factor increases, holding all other factors constant.
(b) The
table does exhibit diminishing returns because the marginal product of labor
falls as labor increases:
|
L
|
TP
|
MP
|
|
0
|
0
|
—
|
|
1
|
5
|
5
|
|
2
|
9
|
4
|
|
3
|
12
|
3
|
|
4
|
14
|
2
|
|
5
|
15
|
1
|
5. (a) Total costs of each technique are as follows:
|
|
 |
 |
 |
 |
 |
|
Tech A
|
$9
|
$12
|
$24
|
$30
|
$36
|
|
Tech
B
|
$12
|
$19
|
$26
|
$33
|
$38
|
Technique A is cheaper at all levels
of output.
(b) Labor
and capital employed would be as follows:
|
Q
|
L
|
K
|
|
1
|
5
|
2
|
|
2
|
10
|
1
|
|
3
|
14
|
5
|
|
4
|
18
|
6
|
|
5
|
20
|
8
|
(c)
(d) With the price of labor rising to $3:
|
|
 |
|
|
|
|
|
Tech
A
|
$19
|
$32
|
$52
|
$66
|
$76
|
|
Tech
B
|
$16
|
$25
|
$34
|
$43
|
$50
|
Labor and capital employed would be
as follows:
|
Q
|
L
|
K
|
|
1
|
2
|
5
|
|
2
|
3
|
8
|
|
3
|
4
|
11
|
|
4
|
5
|
14
|
|
5
|
6
|
16
|
6. Clearly, the labor-intensive way
would be to carry the boxes down the hall and up the stairs one at a time. She
could get a friend or two to help. If the dorm has an elevator and she can
borrow a hand truck, the job would be easy. She would be using capital to raise
her productivity. To go three miles across campus, a car (capital) or a truck (more
capital) would be nice, although she could carry the boxes one at a time across
campus as well. In the developing world, where capital is scarce, people carry
most of their stuff. To get the boxes to a new campus, she would probably mail
them or ship them UPS. In this case, they would go in a big truck or an
airplane (a great deal of capital).
