Explicit costs: $37 000 (= $12 000 for the helper + $5 000 of rent + $20 000 of materials). Implicit costs: $22 000 (= $4 000 of forgone interest + $15 000 of forgone salary + $3 000 of entrepreneurship).

Accounting profit = $35 000 (= $72 000 of revenue - $37 000 of explicit costs); Economic profit = $13 000 (= $72 000 - $37 000 of explicit cost - $22 000 of implicit costs)

Marginal product data top to bottom: 15; 19; 17; 14; 9; 6; 3; 21. Average product data top to bottom: 15; 17; 17; 16.25; 14.8; 13.33; 11.86; 10.25. Your diagram should have the same general characteristics as text Figure 22-2.

MP is the slope -- the rate of change -- of the TP curve. When TP is rising at an increasing rate MP is positive and rising. When TP is rising at a diminishing rate MP is positive but falling. When TP is falling MP is negative and falling. AP rises when MP is above it; AP falls when MP is below it.

MP first rises because the fixed capital gets used more productively as added workers are employed. Each added worker contributes more to output than the previous worker because the firm is better able to use its fixed plant and equipment. As still more labor is added the law of diminishing returns takes hold. Labor becomes so abundant relative to the fixed capital that congestion occurs and marginal product falls. At the extreme the addition of labor so overcrowds the plant that the marginal product of still more labor is negative -- total output falls.

Illustrated by Figure 22-6. Because labor is the only variable input and its price (its wage rate) is constant MC is found by dividing the wage rate by MP. When MP is rising MC is falling; when MP reaches its maximum MC is at its minimum; when MP is falling MC is rising.

The total fixed costs are all $60. The total costs are all $60 more than the total variable cost. The other columns are shown in Question 4 in Chapter 23.

(a) See the graph. Over the 0 to 4 range of output the TVC and TC curves slope upward at a decreasing rate because of increasing marginal returns. The slopes of the curves then increase at an increasing rate as diminishing marginal returns occur.

(b) See the graph. AFC (= TFC/Q) falls continuously since a fixed amount of capital cost is spread over more units of output. The MC (=change in TC/change in Q) AVC (= TVC/Q) and ATC (= TC/Q) curves are U-shaped reflecting the influence of first increasing and then diminishing returns. The ATC curve sums AFC and AVC vertically. The ATC curve falls when the MC curve is below it; the ATC curve rises when the MC curve is above it. This means the MC curve must intersect the ATC curve at its lowest point. The same logic holds for the minimum point of the AVC curve.

(c1) If TFC had been $100 instead of $60 the AFC and ATC curves would be higher -- by an amount equal to $40 divided by the specific output. Example: at 4 units AVC = $25.00 [= ($60 + $40)/4]; and ATC = $62.50 [= ($210 + $40)/4]. The AVC and MC curves are not affected by changes in fixed costs.

(c2) If TVC had been $10 less at each output MC would be $10 lower for the first unit of output but remain the same for the remaining output. The AVC and ATC curves would also be lower -- by an amount equal to $10 divided by the specific output. Example: at 4 units of output AVC = $35.00 [= ($150 - $10)/4] ATC = $50 [= ($210 - $10)/4]. The AFC curve would not be affected by the change in variable cost.

The long-run ATC curve is U-shaped. At first long-run ATC falls as the firm expands and realizes economies of scale from labor and managerial specialization and the use of more
efficient capital. The long-run ATC curve later turns upward when the enlarged firm experiences diseconomies of scale usually resulting from managerial inefficiencies.

The MES (minimum efficient scale) is the smallest level of output needed to attain all economies of scale and minimum long-run ATC.

If long-run ATC drops quickly to its minimum cost which then extends over a long range of output the industry will likely be composed of both large and small firms. If long-run ATC descends slowly to its minimum cost over a long range of output the industry will likely be composed of a few large firms. If long-run ATC curve drops quickly to its minimum point and then rises abruptly the industry will likely be composed of many small firms.