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lowered, while raising the same amount of tax revenue.

For each of these deductions, what would you expect the likely effect on taxpayer behavior to be? Discuss the pros and cons of each deduction from the standpoint of efficiency, vertical equity, and horizontal equity. Would you keep or eliminate the deduction?

1. This chapter discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost. Fill in the type of cost that best completes each sentence: a. What you give up for taking some action is called the ______.

b. _____ is falling when marginal cost is below it and rising when marginal cost is above it. c. A cost that does not depend on the quantity produced is a(n) ______.

d. In the ice-cream industry in the short run, ______ includes the cost of cream and sugar but not the cost of the factory.

e. Profits equal total revenue less ______. f. The cost of producing an extra unit of output is the ______.

2. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. a. Define opportunity cost.

b. What is your aunt‘s opportunity cost of running a hardware store for a year? If your aunt thought she could sell $510,000 worth of merchandise in a year, should she open the store? Explain.

3. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:

Quantity of Fish Hours (in pounds)

0 hours 0 lb. 1 10 2 18 3 24

4 28 5 30

a. What is the marginal product of each hour spent fishing?

b. Use these data to graph the fisherman‘s production function. Explain its shape. c. The fisherman has a fixed cost of $10 (his pole). The opportunity cost of his time is $5 per hour. Graph the fisherman‘s total-cost curve. Explain its shape.

4. Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus‘s output in a given day:

Average

Marginal Total Total Marginal

Workers Output Product Cost Cost Cost

0 0 ___ ___ ___ ___ 1 20 ___ ___ ___ ___ 2 50 ___ ___ ___ ___ 3 90 ___ ___ ___ ___ 4 120 ___ ___ ___ ___ 5 140 ___ ___ ___ ___ 6 150 ___ ___ ___ ___ 7 155 ___ ___

a. Fill in the column of marginal products. What pattern do you see? How might you explain it?

b. A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to fill in the column for total cost.

c. Fill in the column for average total cost. (Recall that ATC = TC/Q.) What pattern do you see?

d. Now fill in the column for marginal cost. (Recall that MC = ΔTC/ΔQ.) What pattern do you see?

e. Compare the column for marginal product and the column for marginal cost. Explain the relationship.

f. Compare the column for average total cost and the column for marginal cost. Explain the relationship.

5. You are the chief financial officer for a firm that sells digital music players. Your firm has the following average-total-cost schedule:

Quantity Average Total Cost

600 players $300 601 301

Your current level of production is 600 devices, all of which have been sold. Someone calls, desperate to buy one of your music players. The caller offers you $550 for it. Should you accept the offer? Why or why not?

6. Consider the following cost information for a pizzeria:

Quantity Total Cost Variable Cost

0 dozen pizzas $300 $ 0 1 350 50 2 390 90 3 420 120 4 450 150 5 490 190 6 540 240

a. What is the pizzeria‘s fixed cost? b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also, calculate the marginal cost per dozen pizzas using the information on variable cost. What is the relationship between these sets of numbers? Comment.

7. You are thinking about setting up a lemonade stand. The stand itself costs $200. The

ingredients for each cup of lemonade cost $0.50. a. What is your fixed cost of doing business? What is your variable cost per cup? b. Construct a table showing your total cost, average total cost, and marginal cost for output levels varying from 0 to 10 gallons. (Hint: There are 16 cups in a gallon.) Draw

the three cost curves.

8. Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs:

Quantity of

Houses Painted 1 2 3 4 5 6 7 per Month

Variable Costs $10 $20 $40 $80 $160 $320 $640

Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company? 9. A firm uses two inputs in production: capital and labor. In the short run, the firm cannot adjust the amount of capital it is using, but it can adjust the size of its workforce. What happens to the firm‘s average total cost curve, the average variable cost curve, and the marginal cost curve when a. the cost of renting capital increases? b. the cost of hiring labor increases?

10. The city government is considering two tax proposals:

? A lump-sum tax of $300 on each producer of

hamburgers.

? A tax of $1 per burger, paid by producers of

hamburgers.

a. Which of the following curves—average fixed cost, average variable cost, average total cost, and marginal cost—would shift as a result of the lump-sum tax? Why? Show this in a graph. Label the graph as precisely as possible.

b. Which of these same four curves would shift as a result of the per-burger tax? Why? Show this in a new graph. Label the graph as precisely as possible.

11. Jane‘s Juice Bar has the following cost schedules:

Quantity Variable Cost Total Cost

0 vats of juice $ 0 $ 30 1 10 40 2 25 55 3 45 75 4 70 100 5 100 130 6 135 165