1

Economics 101

Fall 2001

Answers to Practice Questions 5

Output	Workers Hired	TFC	TVC	TC	MC	AFC	AVC	ATC
0	0	$2000	0	$2000	-	-	-	-
1	1	$2000	300	$2300	300	2000	300	2300
2	3	$2000	900	$2900	600	1000	450	1450
3	6	$2000	1800	$3800	900	667	600	1267
4	10	$2000	3000	$5000	1200	500	750	1250
5	15	$2000	4500	$6500	1500	400	900	1300

2. a.By the condition D=S, P^*=70 and Q^*=30.

b. MC and ATC cross at the lowest point of ATC. Thus if we set MC=TAC, then we can find the production quantity which minimizes ATC.

MC= 20Q+1 = ATC = 10Q + 1 + 10/Q

Then Q=1(Q>0).

c.Since ATC increases as the total level of production increases, this indicates diseconomies of scale.

3. c

4. d.

We say a firm experiences constant return to scale if LRAVC remains constant regardless of an increase in production. Thus, the microsoft’s LRAVC remains constant although Microsoft doubles its production quantity.

To satisfy the economies of scale condition, LRAVC must decrease to an amount less than $20 per unit.

5.a

6.Similar to the question 2, MC and ATC must cross single time at the lowest ATC point. Thus MC should be 50 when quantities are 3. Since ATC increases as the increase of quantities, it shows diseconomies of scale.

7. If you reformulate the table,

Price	Quantity	TR	MR	TC	MC
1	3	3	-	10	-
2	5	10	7	13	3
3	6	18	8	20	7
4	7	28	10	30	10
5	9	45	17	35	5

thus P=4, Q=7 is the answer.