Page 622 - Krugmans Economics for AP Text Book_Neat

time, of course, yogurt mix, cups, and so on) is as shown in 12. The accompanying table shows a car manufacturer’s total cost
the accompanying table. of producing cars.

Quantity of labor Quantity of frozen Quantity of cars TC
(workers) yogurt (cups)
0 $500,000
0 0
1 540,000
1 110
2 560,000
2 200
3 570,000
3 270
4 590,000
4 300
5 620,000
5 320
6 660,000
6 330
7 720,000
8 800,000
a. What are the fixed inputs and variable inputs in the produc- 9 920,000
tion of cups of frozen yogurt?
10 1,100,000
b.Draw the total product curve. Put the quantity of labor on
the horizontal axis and the quantity of frozen yogurt on the
vertical axis. a. What is this manufacturer’s fixed cost?
c. What is the marginal product of the first worker? The sec- b.For each level of output, calculate the variable cost (VC). For
ond worker? The third worker? Why does marginal product each level of output except zero, calculate the average vari-
decline as the number of workers increases? able cost (AVC), average total cost (ATC), and average fixed
cost (AFC). What is the minimum-cost output?
10. The production function for Marty’s Frozen Yogurt is given in
Problem 9. Marty pays each of his workers $80 per day. The c. For each level of output, calculate this manufacturer’s mar-
cost of his other variable inputs is $0.50 per cup of yogurt. His ginal cost (MC).
fixed cost is $100 per day. d.On one diagram, draw the manufacturer’s AVC, ATC, and
a. What is Marty’s variable cost and total cost when he pro- MC curves.
duces 110 cups of yogurt? 200 cups? Calculate variable and 13. Labor costs represent a large percentage of total costs for many
total cost for every level of output given in Problem 9. firms. According to a September 1, 2007, Wall Street Journal arti-
b.Draw Marty’s variable cost curve. On the same diagram, cle, U.S. labor costs were up 0.9% during the preceding three
draw his total cost curve. months and 0.8% over the three months preceding those.
c. What is the marginal cost per cup for the first 110 cups of a. When labor costs increase, what happens to average total
yogurt? For the next 90 cups? Calculate the marginal cost cost and marginal cost? Consider a case in which labor
for all remaining levels of output. costs are only variable costs and a case in which they are
both variable and fixed costs.
11. The production function for Marty’s Frozen Yogurt is given in An increase in labor productivity means each worker can
Problem 9. The costs are given in Problem 10.
produce more output. Recent data on productivity show
a. For each of the given levels of output, calculate the average that labor productivity in the U.S. nonfarm business sector
fixed cost (AFC), average variable cost (AVC), and average grew 2% for each of the years 2005, 2006, and 2007. Annual
total cost (ATC) per cup of frozen yogurt. growth in labor productivity averaged 1.5% from the mid-
b.On one diagram, draw the AFC, AVC, and ATC curves. 1970s to mid-1990s, 2.6% in the past decade, and 4% for a
couple of years in the early 2000s.
c. What principle explains why the AFC declines as output in-
creases? What principle explains why the AVC increases as b.When productivity growth is positive, what happens to the
output increases? Explain your answers. total product curve and the marginal product of labor
curve? Illustrate your answer with a diagram.
d.How many cups of frozen yogurt are produced when aver-
age total cost is minimized? c. When productivity growth is positive, what happens to the
marginal cost curve and the average total cost curve? Illus-
trate your answer with a diagram.
d.If labor costs are rising over time on average, why would a
company want to adopt equipment and methods that in-
crease labor productivity?

580 section 10 Behind the Supply Curve: Profit, Production, and Costs