Short-Run Cost and Supply Decisions
1. A firm purchased copper pipes a few years ago at $10 per pipe and stored them, using them only as the
need arises. The firm could sell its remaining pipes in the market at the current price of $9. What is the
opportunity cost of each remaining pipe and what is the sunk cost?
Assume that the fixed costs for a soybean farm, which include the costs of land, equipment and fertilizer
is $10,000 per year and that labor is the only variable cost of running the farm. And assume that the firm
pays each worker $2,000 a month. The productivity of labor is shown in the following table.
Amount of Labor
Bases on the information above, complete the following table and graph AVC, ATC and MC (A graph
produced by excel is preferable.)
3. As a member of a local advocacy group for low-income families, you have been placed in charge of
organizing a one-day seminar on welfare reform. The costs for the event are as follows:
Rent for auditorium:
$10 per person
$15 per person
$25 per person
a) What are the average variable costs of the seminar?
b) What are the fixed costs of the seminar?
c) Based on past events, you expect that 100 people will attend the seminar. What price should you charge
each attendee so that the seminar breaks even? (Hint: to break even, price must equal the average
total cost. It is different from the shut-down decision where price need to be at least as high as
average variable cost.)
d) To encourage more young people to get involved, your supervisor suggests charging students a
discounted rate. You decide to have students pay only the marginal costs of their attendance. What
price should you charge students to attend the seminar?
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction
of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice.
Unethical use is strictly forbidden.
Opportunity cost is the cost of the next best alternative. As the $10 could have been invested in a bank with interest, $10 is the opportunity cost.
Sunk costs are the costs that cannot be recovered and $10-$9 = $1 per pipe is the sunk cost....