Exam 6: Costs

You have two career options. You can work for someone else for $50,000 a year, or, you can run your own business, with an annual revenue of $100,000, and explicit costs of $40,000 annually. Explain which career option a profit-maximizer would select and why.

If the isoquants are straight lines or L-shaped, then a cost-minimizing firm will

If there are diseconomies of scale within a given range of output, which of following is(are)TRUE?

Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month, and brought in revenues of $14,500. According to her accountant, what are Manisha's profits?

A cost function has economies of scale if

Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business. Her annual opportunity cost of this new business is

If producing more output has no effect on average cost then

Tom is going to quit his job to pursue his PhD in economics, which will take him 6 years to complete. He currently makes $55,000 per year as a high school teacher. While going to school, he will receive a stipend of $24,000 per year plus $6,000 per year to help cover food and rent. His living expenses are the same regardless of what he does. What is Tom's opportunity cost of pursuing his PhD?

A durable good is product that

When the isocost line is tangent to the isoquant, then

Fixed costs

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The marginal cost of the 5th T-shirt is

The Cobb-Douglas production function for a beer manufacturer is q=1.52L0.6K0.4. If we assume that the firm's capital is fixed at 250 units and the rental rate of capital is $5 per unit, then average fixed cost is

One problem with measuring a durable good's cost is

Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, an increase in the price of shovels will result in

Assume baseball player salaries are fully determined before the season starts. From the point of view of the baseball team owner, player salaries during the course of the season are then

When you have diminishing marginal returns to labor

Fixed costs are

A firm's cost curve is determined by

Suppose capital and labor are perfect substitutes resulting in a production function of q = K + L. That is, the isoquants are straight lines with a slope of -1. Derive the long-run total cost function TC = C(q)when the wage rate is w and the rental rate on capital is r.