Page 144 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 9: Cost Concepts

its enrollment, didn’t look so good. It more than covered its incremental cost, but barely Notes
paid back its allocated cost in the current year. Its newly hired dean had been promised the
full attention of the college’s fundraising office. After all, the b-school’s revenue was “free”

in terms of incremental cost, and who wouldn’t want more of that? After the cost-allocation
project, however, the college’s president decided one of its older, better-established schools
deserved a higher fundraising priority.

What do you think was the problem with the college? How can it be rectifi ed?
5. Raman has a widget producer with one widget producing machine that costed him ` 1000
last year. He wants to see if he should buy an appliance that paints the widgets yellow,
fetching ` 100 more per widget. But he has no idea if this is a good investment. In your
evaluation of the investment, do you include the cost of the widget machine? Why/why
not?
6. Why do increasing opportunity costs exist? Illustrate with examples.

7. Why are variable costs more relevant than fixed costs in short-term decision-making?

8. With the increase in output of the firms, their average total cost and average variable cost
curves come closer and closer to each other but never meet. Why?
9. Show the circumstances where the marginal cost is constant throughout but the average
cost is falling.
10. Can the short run average total cost ever be less than the long run average total cost?

11. The output and total cost data for a firm are given below. Work out the following costs:
TFC, TVC, AFC, AVC, ATC and MC at various levels of output.
Units of output 0 1 2 3 4 5 6
Total Cost (`) 120 180 200 210 225 260 330
12. Suppose that the short run costs for a paintbrush manufacturer are given by the
expression:
TC = 100+2Q+0.01 Q 2
(a) What are the fixed costs of this manufacturer?

(b) What are the total costs, average cost, average variable cost and marginal cost at 50
and 100 units of output?
(c) At what output is average cost the minimum?
13. Suppose that labour costs ` 10 per unit and capital costs ` 5 per unit. The least cost
combinations of capital and labour are as follows:
Output 100 200 300 400 500 600 700
Labour 5 6 8 10 13 18 24
Capital 10 12 14 20 28 38 54
Prepare the table showing long run total cost, long run average cost and long run marginal
cost.

14. If machines were variable and labour fixed, how would the general shapes of the short run

average cost curve and marginal cost curve change?
15. If average productivity falls, will marginal cost necessarily rise? How about average cost?

16. Discuss the concept of economies of scale and economies of scope. Give suitable
examples.

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