1) Jane operates a business driving an ice cream truck leased from the “Ding Dong Ice Cream Company.” Her annual expenses and revenues are as follows.
Annual Revenues
Annual Expenses
$60,000 ice cream sales
$5000 annual franchise fee paid to be sole distributor of ding-dong products
$200 per month: Monthly rental fee for truck; (lease contract = 1 yr.)
$50 per month: Monthly expenditure on gas for truck
$2000 per month: Cost of Ice Cream products purchased from ding-dong
a) Jane claims that her business earned a “profit” of $28,000 last year. Do you agree? Explain.
b) What are Jane’s fixed costs?
2) Why do economists treat a normal rate of return on invested capital as an element of fixed costs rather than as a profit?
3)”In economics, the ‘long run’ is any period of time greater than 1 year.” Agree or disagree with this statement and explain your reasoning.
4) Suppose that a small custom-painting & detailing auto body shop has the following expenses:
Fixed Cost = $400 per week
# cars painted
variable cost
marginal cost per auto
average cost
avg. fixed-cost
2
4
6
8
10
12
14
16
18
20
800
1400
1800
2100
2400
2800
3400
4400
5600
7000
a) fill in the blanks in the above table
b) at what level of output does the firm start to experience diminishing marginal returns to its variable inputs?
c) what is the “minimum efficient scale of production” in this industry if this firm’s cost schedules are typical of all firms in the market and no alternative more capital intensive technologies exist.
5) Explain why marginal cost curves slope downward as firms increase their output from “0” ; but, eventually, as output continues to expand, marginal cost curves slope upward and ultimately become vertical.
6) When a firm is producing at the output level which minimizes average total cost, the marginal cost of production equals the average cost of production. Agree or disagree and explain your answer or illustrate it with a graph.
7) Firms in a competitive market maximize profits by operating at the level of output which minimizes their average cost of production in the short run. Agree or disagree with this statement and explain your reasons.
8) How are “economies of scope” different from “economies of scale?” Give an example of each. Do you see any connection between either of these concepts and the recent merger between Proctor-Gamble & Gilette? Explain.
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