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Chapter 7: Difference between long run and short run. (page 237)
What is the short run in the microeconomic theory?
The short-run is the period where at least 1 factor of production is fixed and cannot be changed.
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Joe quits his computer programming job, where he was earning a salary of \(50,000 per year, to start his own computer software business in a building that he owns and was previously renting out for \)24,000 per year. In his first year of business he has the following expenses: salary paid to himself, \(40,000; rent, \)0; other expenses, $25,000. Find the accounting cost and the economic cost associated with Joe’s computer software business.
Suppose that a paving company produces paved parking spaces (q) using a fixed quantity of land (T) and variable quantities of cement (C) and labor (L). The firm is currently paving 1000 parking spaces. The firm’s cost of cement is \(4,000 per acre covered, and its cost of labor is \)12/hour. For the quantities of C and L that the firm has chosen, MPC = 50 and MPL = 4.
Is this firm minimizing its cost of producing parking spaces? How do you know?
If the firm is not cost-minimizing, how must it alter its choices of C and L in order to decrease cost?
a. Fill in the blanks in the table below.
| Units of Output | Fixed Cost | Variable Cost | Total Cost | Marginal Cost | Average Fixed Cost | Average Variable Cost | Average Total Cost |
| 0 | 100 | ||||||
| 1 | 125 | ||||||
| 2 | 145 | ||||||
| 3 | 157 | ||||||
| 4 | 177 | ||||||
| 5 | 202 | ||||||
| 6 | 236 | ||||||
| 7 | 270 | ||||||
| 8 | 326 | ||||||
| 9 | 398 | ||||||
| 10 | 490 |
b. Draw a graph that shows marginal cost, average variable cost, and average total cost, with cost on the vertical axis and quantity on the horizontal axis.
A chair manufacturer hires its assembly-line labor for \(30 an hour and calculates that the rental cost of its machinery is \)15 per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. If the firm is currently using 3 hours of labor for each hour of machine time, is it minimizing its costs of production? If so, why? If not, how can it improve the situation? Graphically illustrate the isoquant and the two isocost lines for the current combination of labor and capital and for the optimal combination of labor and capital.
A firm has a fixed production cost of \(5000 and a constant marginal cost of production of \)500 per unit produced.
What is the firm’s total cost function? Average cost?
If the firm wanted to minimize the average total cost, would it choose to be very large or very small? Explain.
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