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in Figure 11.1.
5 190
6 210
b. Calculate the average product of
7 220
labor and draw the average product
curve.
The average product of
labor is equal to total
product divided by the
quantity of labor
employed. For example,
when 3 workers are
employed, they produce
120 surfboards a week, so
average product is 40
surfboards per worker. As
Figure 11.2 (on the next
page) shows, the average
product curve is upward
sloping when up to 3 workers are hired and then is downward sloping
when more than 4 workers are hired.
AP MP AVC MC
Labor Output (surfboards (surfboards (dollars (dollars
(workers) (surfboards) per worker) per worker) per per
surfboard) surfboard)
1 30 30.0 16.67
40.0 12.50
2 70 35.0 14.29
50.0 10.00
3 120 40.0 12.50
40.0 12.50
4 160 40.0 12.50
30.0 16.67
5 190 38.0 13.16
20.0 25.00
6 210 35.0 14.29
10.0 50.00
7 220 31.4 15.91
Figure 11.7 shows an airlines TFC and TVC curves; Figure 11.8
shows an airlines AFC, AVC, and MC curves. The increase in the
price of fuel has no effect on the airlines fixed cost, so the
TFC and AFC curves do not change. The increase in the price of
fuel raises the firms variable costs and its total costs. As a
result the firms TVC, AVC and MC curves shift upward as illustrated
in the figures from the curves labeled 0to the curves labeled
1.
Figure 11.9 shows the airlines TP curves. The new engines shift
the TP curve upward from TP0 to TP1. Figure 11.10 shows the airlines
MP and AP curves. These curves also shift upward as a result of
the new fuel efficient engines.
e. Explain how Jackies uses its LRAC cost curve to decide how
many canoe to rent.
Jackies will use its long-run average total cost curve by building
the size of the plant that minimizes its long-run average cost
at the level of output that Jackies expects to produce.
b. Draw a graph to show the effect of the flood on the total product
curve and marginal product curve at Caboots.
Figure 11.13 shows the downward shift in the total product curve
and Figure 11.14 shows the downward shift in the marginal product
curve. The flood and lack of morale shift the TP and MP curves
downward from TP1 to TP2 and from MP1 to MP2.
c. Explain why the gap between total cost and total variable cost
is the same at all outputs.
The gap between total cost and total variable cost is total fixed
cost. Because the fixed cost is the same at all levels of output,
the difference between the total cost and total variable cost is
constant.
15. ProPainters hire students at $250 a week to paint houses. It
leases equipment at $500 a week. Suppose that ProPainters
doubles the number of students it hires and doubles the amount
of equipment that it leases. ProPainters experiences
diseconomies of scale.
a. Explain how the ATC curve with one unit of equipment differs
from that when ProPainters uses double the amount of
equipment.
Because ProPainters experiences diseconomies of scale, when
ProPainters doubles its inputs the minimum average cost is higher
than when it uses the lesser quantities of inputs. Even so, at
high levels of output the average total cost of producing the large
level of output with the greater quantities of inputs is lower
than the average total cost of producing this large level of output
with the smaller quantities of inputs.
b. On your graph in a, plot the ATC curve for Plant 3 and Plant
4.
Figure 11.18 shows these ATC curves.
c. How might combining Gaps concept stores into one store help
better take advantage of economies of scale?
At 12,500 square feet Gaps stores were too large and Gap was
incurring diseconomies of scale. When Gap combines its separate
Gap concept stores into a smaller space, Gap will use fewer
resources, particularly less capital and less labor. Gaps costs
will be less as a result. Additionally Gaps sales will be less
but the proportionate decrease in cost will exceed the decrease
in Gaps production. In this case Gaps average costs will decrease
so that Gap can reap economies of scale it currently is not
enjoying.
22. Study Reading Between the Lines on pp. 266-267 and then answer
the following questions.
a. Sketch the AFC, AVC, and ATC curves for electricity production
using seven technologies: (i) nuclear, (ii) coal, (iii) gas,
(iv) hydro (v) wind, (vi) SUNRGIs new solar system, and (vii)
todays solar technology.