Answers to Week 5 Practice Questions

Multiple Choice

1) d 
2) d
3) c
4) b
5) c
6) a
7) a
8) c
9) d
10) b
11) c
12) b
13) a
14) b
15) c

Challenge Questions

1) The table would look as follows remembering that 

	a) TFC does not vary with output
	b) TC=TFC+TVC
	c) AVC=TVC/Q
	d) AFC=TFC/Q
	e) ATC=TC/Q
	f) MC is the change in TVC (or TC) for each increase in quantity
 
Quantity   TVC    TFC     TC     AVC     AFC     ATC     MC   PRICE
 
    0       0      50     50                                    80
    1      50      50    100      50      50     100     50     80
    2      90      50    140      45      25      70     40     80
    3     110      50    160    36.7    16.7    53.3     20     80
    4     150      50    200    37.5    12.5      50     40     80
    5     210      50    260      42      10      52     60     80
    6     290      50    340    48.3     8.3    56.6     80     80
    7     410      50    460    58.6     7.1    65.7    120     80
 
 
Diminishing marginal returns start after Q=3 when MC starts increasing.

Profit maximization happens at Q=6 where MC=MR=Price=80.

Profit at Q=6 is TR - TC = (Price * Q) - TC
                         =  80*6  -  340
                         =  480 - 340
                         =  140 economic profit. 


2) Rather than having an "upside down bowl" shape the MP
curve would look like a bowl, with increasing MP for higher level of
labor after a certain point.

Therefore, rather than having a "bowl" shape the MC, AVC and ATC curves
would look like upside down bowls, implying that costs go down for higher
levels of output.

A profit-maximizing firm facing some constant positive price would end up
wanting to produce an infinite amount of product, because the more they
produce the lower their costs, and thus the more profit they make on each
extra unit. The MC graph would intersect the AVC and ATC curves from above
at their MAXIMUM values.

The AFC graph would look exactly the same. 


3) Since there are no fixed costs (TFC), there are no AFC.  Thus, the
average variable costs (AVC) = average total costs (ATC) and there is just
one curve that represents both AVC and ATC.