Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006
156 COSTS OF PRODUCTION [CHAP. 77.2 (a) On the same set of axes, plot the TFC, TVC, and TC schedules in Table 7.5.(b) Explain the reason for the shape of the curves.Table 7.5Q TFC ($) TVC ($) TC ($)0 120 0 1201 120 60 1802 120 80 2003 120 90 2104 120 105 2255 120 140 2606 120 210 330(a)Fig. 7-6a(b)Since TFC remain constant at $120 per time period regardless of the level of output, the TFC curve is parallelto the horizontal axis and $120 above it, TVC are zero when output is zero and rise as output rises. Before thelaw of diminishing returns begins to operate, TVC increase at a decreasing rate. After the law of diminishingreturns begins to operate, TVC increases at an increasing rate. Thus the TVC curve begins at the origin and ispositively sloped. It is concave downward up to the point of inflection and concave upward thereafter. SinceTC equal TFC plus TVC, the TC curve has exactly the same shape as the TVC curve but is everywhere $120above it. In drawing the TFC, TVC, and TC curves, all resources are valued according to their opportunitycost, which includes explicit and implicit costs. Also, the TFC, TVC, and TC curves indicate respectivelythe minimum TFC, TVC, and TC of producing various output levels per time period.7.3 (a) Give some examples of fixed and variable factors in the short run. (b) What is the relationshipbetween the quantity of fixed inputs used and the short-run level of output?(a)(b)Fixed factors in the short run include payments for renting land and buildings, at least part of depreciation andmaintenance expenditures, most kinds of insurance, property taxes, and some salaries such as those of top management,which are fixed by contract and may have to be paid over the life of the contract whether the firm producesor not. Variable factors include raw materials, fuels, most types of labor, excise taxes, and interest on shortrunloans.The quantity of fixed inputs used determines the size or the scale of plant which the firm operates in the shortrun. Within the limits imposed by its scale of plant, the firm can vary its output in the short run by varying thequantity of variable inputs used per unit of time.
CHAP. 7] COSTS OF PRODUCTION 1577.4 From Table 7.5, (a) find the AFC, AVC, AC, and MC schedules and (b) plot the AFC, AVC, AC, andMC schedules of part (a) on one set of axes.(a) Table 7.6Q TFC ($) TVC ($) TC ($) AFC ($) AVC ($) AC ($) MC ($)0 120 0 1201 120 60 180 120 60.00 180.00 602 120 80 200 60 40.00 100.00 203 120 90 210 40 30.00 70.00 104 120 105 225 30 26.25 56.25 155 120 140 260 24 28.00 52.00 356 120 210 330 20 35.00 55.00 70AFC equals TFC divided by output. AVC equals TVC divided by output. AC equals TC divided by output. MCequals the change in either TVC or in TC per unit change in output.(b) See Fig. 7-7.7.5 From the TFC curve in Problem 7.2, derive the AFC curve geometrically and explain its shape.See Fig. 7-8. AFC equals TFC divided by output. TFC equal $120. Thus, when output is 2, AFC equals $120divided by 2, or $60. This is equal to the slope of ray OA and is plotted as point A 0 on the AFC curve. At point B onthe TFC curve, the AFC is given by the slope of ray OB. This equals $30 per unit ($120/4 units) and is plotted aspoint B 0 on the AFC curve. At point C on the TFC curve, AFC equals the slope of ray OC which is $20, This givespoint C 0 on the AFC curve. Other points on the AFC curve could be similarly obtained.The AFC curve is asymptotic to both axes. That is, as we move further and further away from the origin alongeither axis, the AFC curve approaches but never quite touches the axis. Also, AFC times quantity always gives thesame amount (i.e., the constant TFC). Thus, the AFC curve is a rectangular hyperbola.Fig. 7-7
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156 COSTS OF PRODUCTION [CHAP. 7
7.2 (a) On the same set of axes, plot the TFC, TVC, and TC schedules in Table 7.5.
(b) Explain the reason for the shape of the curves.
Table 7.5
Q TFC ($) TVC ($) TC ($)
0 120 0 120
1 120 60 180
2 120 80 200
3 120 90 210
4 120 105 225
5 120 140 260
6 120 210 330
(a)
Fig. 7-6a
(b)
Since TFC remain constant at $120 per time period regardless of the level of output, the TFC curve is parallel
to the horizontal axis and $120 above it, TVC are zero when output is zero and rise as output rises. Before the
law of diminishing returns begins to operate, TVC increase at a decreasing rate. After the law of diminishing
returns begins to operate, TVC increases at an increasing rate. Thus the TVC curve begins at the origin and is
positively sloped. It is concave downward up to the point of inflection and concave upward thereafter. Since
TC equal TFC plus TVC, the TC curve has exactly the same shape as the TVC curve but is everywhere $120
above it. In drawing the TFC, TVC, and TC curves, all resources are valued according to their opportunity
cost, which includes explicit and implicit costs. Also, the TFC, TVC, and TC curves indicate respectively
the minimum TFC, TVC, and TC of producing various output levels per time period.
7.3 (a) Give some examples of fixed and variable factors in the short run. (b) What is the relationship
between the quantity of fixed inputs used and the short-run level of output?
(a)
(b)
Fixed factors in the short run include payments for renting land and buildings, at least part of depreciation and
maintenance expenditures, most kinds of insurance, property taxes, and some salaries such as those of top management,
which are fixed by contract and may have to be paid over the life of the contract whether the firm produces
or not. Variable factors include raw materials, fuels, most types of labor, excise taxes, and interest on shortrun
loans.
The quantity of fixed inputs used determines the size or the scale of plant which the firm operates in the short
run. Within the limits imposed by its scale of plant, the firm can vary its output in the short run by varying the
quantity of variable inputs used per unit of time.
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