Short Run Costs: Starving Student Movers, A Competitor To Sc

Short Run Costsstarving Student Movers A Competitor To Scratch Dent

Short-Run Costs Starving Student Movers (a competitor to Scratch & Dent), can use varying amounts of labor to move furniture, with the corresponding output and costs shown in the table below. Fill in the missing cost numbers in the table, and then graph the AC, AVC and MC curves on a separate piece of graph paper (all three curves can be drawn on the same graph).

L (Workers/Day) | Q (Tons/Day) | Marginal Output | FC | Fixed Cost | VC | Variable Cost | TC | Total Cost | AFC | Average Fixed Cost | AVC | Average Variable Cost | AC | Average Cost | MC | Marginal Cost

0 | 0 | — | $250.00 | — | — | — | — | — | — | — | — | — | — | — | — | —

150 | 300 | 450.00 | What is the firm’s fixed cost? $____________

What is the firm’s price of labor? $______________

Starving Student faces diminishing returns to labor if it moves more than _______ tons of furniture per day.

At what output level is the firm’s average cost minimized? Q = _________

At what output level is the firm’s average variable cost minimized? Q = ___________

Additional Exercises

If the average cost of producing 25 ice cream cones is $.50 each, what is the total cost of producing 25 ice cream cones? $___________

If the marginal cost of the 25th ice cream cone is $.75, and the average cost of 25 cones is $.50, the producer’s average cost must be (circle one) falling / at its minimum point / rising

True or False: If a firm’s marginal output is falling as output increases, then its marginal cost is rising.

If a firm’s average variable cost is rising as output increases, its average cost must also be rising.

An increase in fixed cost would cause marginal costs to increase.

An increase in the price of a variable input would cause marginal costs to increase.

An increase in the price of a variable input would cause average costs to increase.

When marginal cost is rising, average cost must be rising.

When marginal cost is less than average variable cost, average variable cost must be falling.

Paper For Above instruction

The concept of short-run costs is pivotal in understanding how firms operate efficiently under constraints in the short term. In the case of Starving Student Movers, a competitor to Scratch & Dent, analyzing the cost structures, including fixed costs, variable costs, and their impacts on average and marginal costs, provides essential insights into optimal production decisions and economic efficiency.

Fixed costs are expenses that do not vary with the level of output, such as equipment, rent, or salaries of permanent staff. In this scenario, given the initial information, the fixed cost is indicated as $250.00, which generally includes expenses that the firm must pay regardless of the amount of furniture moved each day. This fixed cost remains constant as output varies, serving as a baseline cost against which variable costs fluctuate depending on labor input.

The firm's price of labor is not directly provided but can be inferred from changes in variable costs relative to labor inputs. Typically, this would be determined by dividing the total variable cost by the number of labor units employed at various levels of output, or by analyzing the marginal cost associated with hiring additional workers. Understanding this price helps determine the optimal number of workers to balance labor expenses with productivity gains.

Starving Student Movers faces diminishing returns to labor if they move more than a certain quantity of furniture per day. Diminishing returns occur when each additional worker contributes less to output than the previous one, often due to overcrowding or limited resources. Beyond this point, adding more labor becomes less efficient, increasing marginal costs and potentially escalating average costs as well.

Identifying the output level at which average cost is minimized involves examining the point where the average total cost curve reaches its lowest point. This is critical for firms aiming to maximize efficiency. Based on typical cost behavior, this point often aligns with where marginal cost equals average total cost, reflecting the most cost-effective scale of operation.

Similarly, the minimum point of average variable cost indicates the most efficient level of variable input utilization. Typically, this occurs where the marginal cost intersects with average variable cost, signifying the optimal labor or resource use for short-term production decisions.

The additional exercises reinforce foundational economic principles. For example, if the average cost of 25 ice cream cones is $0.50 each, then the total cost equals $0.50 multiplied by 25, resulting in $12.50. If the marginal cost of the 25th cone is $0.75, which exceeds the average cost, then the average cost is rising, not at its minimum, indicating decreasing efficiency at this output level.

Furthermore, the relationship between marginal output and marginal cost suggests that when marginal output decreases (diminishing returns), marginal cost tends to increase, due to the necessity of more input to produce additional output. Similarly, if average variable costs rise as output increases, it typically implies inefficiencies or resource constraints, leading to increased average total costs.

Cost behavior analysis shows that an increase in fixed costs does not affect marginal costs directly since they are constant with respect to output; however, it increases total costs. In contrast, increases in the price of variable inputs directly impact marginal costs because these costs are dependent on input prices. As marginal cost rises, is it common that average costs also escalate, especially when marginal cost exceeds average costs, pushing the average up.

Understanding the interrelationships among these cost measures is crucial for decision-making. For example, when marginal cost is rising, the average cost is also generally rising, as the additional cost of producing one more unit pulls the average upward. Conversely, when marginal cost is less than average cost, the average cost is decreasing, since adding units at lower marginal costs brings down the overall average.

References

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