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- What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do you suppose that is? Is this relationship the same in the long run as in the short run?Based on your answers to the WipeOut Ski Company in Exercise 7.3, now imagine a situation where the firm produces a quantity of 5 units that it sells for a price of 25 each. What will be the companys profits or losses? How can you tell at a glance whether the company is making or losing money at this price by looking at average cost? At the given quantity and price, is the marginal unit produced adding to profits?Do you think that the taxicab industry in large cities would be subject to significant economies of scale? Why or why not?
- How does fixed cost affect marginal cost? Why is this relationship important?What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect me lung-nm average cost curve of a firm? Can you draw the old curve and the new one on the same axes? How might such an improvement affect other firms in the industry?
- Would you consider an interest payment on a loan to a film an explicit or implicit cost?What is the difference between a fixed input and a variable input?A firm had sales revenue of 1 million last year. It spent 600,000 on labor, 150,000 on capital and 200,000 on materials. What was the firms accounting profit?
- Are fixed costs also sunk costs? Explain.Return to Figure 7.7. What is the marginal gain in output from increasing the number of batters from 4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns? Figure 7.7 How output Affects Total costsAutomobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic auto manufacturers, but the demand for domestic autos is no more than 2.5 times the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen to the domestic auto industry in the long run?