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Cost
CHAPTER QUESTIONS 6.1 Explain the difference between marginal cost and incremental cost. 6.2 Marginal cost is the cost of producing the “last” unit of output. Do you agree? If not, then why not. 6.3 Consider the production function Q = f(K, L), where Q represent units of output, and K and L represent units of capital and labor inputs, respectively. In the short run, demonstrate that for fixed input prices, the shape of the total variable cost curve is identical to the shape of the total product of labor curve. 6.4 All costs are opportunity costs. Do you agree? Explain. 6.5 Only implicit costs are opportunity costs. Do you agree with this statement? If not, then why not? 6.6 Since the prices of productive inputs must always be positive, and since the cost of hiring another unit of, say labor, is the wage rate, it must also be true that marginal cost of producing one more unit of output must also be positive. Do you agree? Explain. 6.7 Demonstrate that MC = ATC when ATC is minimized. 6.8 Demonstrate that MC = AVC when AVC is minimized. 6.9 Explain the difference between total fixed cost and sunk cost. Give examples of each. 6.10 For the production function Q = f(K, L), demonstrate that in the short run marginal cost is equal to the wage rate divided by the marginal product of labor. 6.11 For the total cost function TC = b0 + b1Q + b2Q2 + b3Q3, demonstrate that (3b3b1 - b22) > 0 is required for minimum marginal cost to be positive. 6.12 Explain the difference between the learning curve effect and the experience curve effect. 6.13 The learning curve effect is summarized by the equation G = jQb, where j is the cost of producing the first unit of output, b = (log m)/(log l), m is the learning factor, and l is a scalar increase in production. How would you go about estimating the values of j and b? 6.14 Suppose that learning factor is zero. What does this imply about the amount of labor that should be used in the production process? 6.15 Large firms tend to be more management “top heavy.” That is, a larger proportion of their personnel are management than is true of small firms. Do you agree with this statement? Why? 6.16 Large companies are more likely to experience diseconomies of scale than small companies. Do you agree? If not, then why not? 6.17 Explain some of the reasons a firm might experience economies of scale. What is the relation between economies of scale and increasing returns to scale? Be specific. 6.18 Economies of scale and economies of scope are the same thing. Do you agree with this statement? If not, then why not?
