Problems

cost curve is increasing. Why do you think that average and marginal cost curves have the same general shape? 34 . 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? 35 . It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss. 36 . Return to Table 7.12. In the top half of the table, at what point does diminishing marginal productivity kick in? What about in the bottom half of the table? How do you explain this? 37 . How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect the long-run 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? 38 . Do you think that the taxicab industry in large cities would be subject to significant economies of scale? Why or why not?

Problems

39 . A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not need to borrow. Should the firm make the investment? Show your work. 40 . Return to Figure 7.7. What is the marginal gain in output from increasing the number of barbers from 4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns? 41 . Compute the average total cost, average variable cost, and marginal cost of producing 60 and 72 haircuts. Draw the graph of the three curves between 60 and 72 haircuts. 42 . A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: intensive labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front. To summarize, the method choices are: Method 1: 50 units of labor, 10 units of capital Method 2: 20 units of labor, 40 units of capital Method 3: 10 units of labor, 70 units of capital If hiring labor for the winter costs $100/unit and a unit of capital costs $400, what is the best production method? What method should the company use if the cost of labor rises to $200/unit?

FIGURE 8.1Depending on the competition and prices offered, a soybean farmer may choose to grow a different crop. (Credit: modification “Agronomist & Farmer Inspecting Weeds” by United Soybean Board/Flickr, CC BY 2.0)

In this chapter, you will learn about:

• Perfect Competition and Why It Matters
• How Perfectly Competitive Firms Make Output Decisions
• Entry and Exit Decisions in the Long Run
• Efficiency in Perfectly Competitive Markets

BRING IT HOME A Dime a Dozen When you were younger did you babysit, deliver papers, or mow the lawn for money? If so, you faced stiff competition from many other competitors who offered identical services. There was nothing to stop others from also offering their services. All of you charged the “going rate.” If you tried to charge more, your customers would simply buy from someone else. These conditions are very similar to the conditions agricultural growers face.