Questions for review

1. Why should a person in charge of hiring productive inputs care more about marginal products than about average products?

2. Distinguish between diminishing returns to a variable input and decreasing returns to scale.

3. How is an isoquant map like an indifference map? In what important respect do the two constructs differ?

Problems

Suppose the marginal product of labor is currently equal to the average product. If you were one of ten new workers the firm was about to hire, would you prefer to be paid the value of your average product or the value of your marginal product? Would it be in the interests of an employer to pay you the value of your average product?

You own and manage your own business. The business requires an average of 80 hours of your time every week. Suppose that instead of working in your own business, your best alternative is to work the same amount of hours in a large corporation for an income of $125,000 per year.

What is the opportunity cost of your decision to devote your time to managing your business?

Is this cost explicit or implicit?

Consider two next-door neighbors, Sarah and John, living in identical apartments in a condominium complex. John rents his unit for $2000/month. Sarah purchased her apartment (with cash) in a previous year for $200,000.

Make the argument that the opportunity cost of both John and Sarah’s decision to reside in their apartment is $2000.

Which opportunity costs is considered explicit? implicit?

Should both John and Sarah consider their opportunity cost in making the decision to occupy their condominium unit?

Mike is visiting relatives over a recent Christmas holiday. He is invited by his sister to join her and a nephew to see the latest Star Wars movie. He does not want to see the movie, but initially agrees. The movie ticket costs $15. It is agreed everyone pays their own ticket. An hour later Mike changes his mind and announces that he, in fact, will not go. By that time, however, a ticket had been purchased for him (online). He is responsible for reimbursement. He then agrees to go as planned.

What is the opportunity cost of Mike’s decision to attend the movie before the tickets were purchased?

What is the opportunity cost of Mike’s decision after the tickets were purchased?

[excerpt from Frank textbook]

Just after finishing college, I was a high school math and science teacher in Sanischare, a small village in eastern Nepal. During my two years there, one of the country’s few roads was in the process of being built through Sanischare. Once the right-of-way was cleared and the culverts and bridges laid in, the next step was to spread gravel over the roadbed. As at almost every other stage of the process, the methods employed at this step were a page torn from another century. The Nepalese workmen squatted by the side of the road in the blazing sun, tapping away at the large rocks with their hammers. In a 12-hour day, each worker would produce a small mound of gravel, not enough to cover even one running foot of roadbed. But there were a lot of people working and eventually the job was done.

In the United States, of course, we do not hire people to hammer rocks into gravel by hand. Instead, we have huge machines that pulverize several tons of rock each minute….