Chapter 7: Production, Costs, and Industry StructureContent check — Economics, Chapter 7: Production, Costs, and Industry Structure

a. Total revenues in this example will be a quantity of five units multiplied by the price of $25/unit, which equals $125. Total costs when producing five units are $130. Thus, at this level of quantity and output the firm experiences losses (or negative profits) of $5.

b. If price is less than average cost, the firm is not making a profit. At an output of five units, the average cost is $26/unit. Thus, at a glance you can see the firm is making losses. At a second glance, you can see that it must be losing $1 for each unit produced (that is, average cost of $26/unit minus the price of $25/unit). With five units produced, this observation implies total losses of $5.

c. When producing five units, marginal costs are $30/unit. Price is $25/unit. Thus, the marginal unit is not adding to profits, but is actually subtracting from profits, which suggests that the firm should reduce its quantity produced.

The marginal product of the third painter is 75 square feet.

$$\begin{array}{ccc}\hfill \text{marginal product}& =& \text{change in total product/change in variable output}\hfill \\ & & \text{change in total product}=275\text{square feet}-200\text{square feet}\hfill \\ & & \text{change in total product}=75\text{square feet}\hfill \\ \hfill \text{marginal product}& =& 75\text{square feet}/1\text{worker}\hfill \\ \hfill \text{marginal product}& =& 75\hfill \end{array}$$

The new table should look like this:

The firm should choose production technology 3 since it has the lowest total cost. This makes sense since, with cheaper machine hours, one would expect a shift in the direction of more machines and less labor.

The firm should choose production technology 2 since it has the lowest total cost. Because the cost of machines increased (relative to the previous question), you would expect a shift toward less capital and more labor.