Answers Chapter 7

1. First, the sample may not be random. For example, a marketing survey that interviews only
the passengers flying in the first-class cabin of a commercial airline will yield biased results.
A second potential problem is response bias. When asked to estimate how often they floss
their teeth each week, most people give a number that is much higher than the true number of
times. Finally, consumers may be unable to respond accurately. People simply do not know
beforehand how their purchases of a good or service would change if the price decreases by
10%.

2. a. X is a normal good. A positive parameter estimate for income (0.225) means the quantity
of X demanded increases (decreases) when income increases (decreases), all other factors
constant, and this is the definition of a normal good.
b. X and Z are complements. A negative parameter estimate for the price of Z (895.3)
means that the quantity of X demanded increases (decreases) when the price of Z
decreases (increases), which is the definition of two goods that are complements in
consumption.
c. Q = 16,784 - 232.43(22.50) + 0.225(43,499) - 895.3(12.50) = 10,150.4

E = b(P / Q) = -232.43(22.50 / 10,150.4) = -0.5152

EM = c(M / Q) = 0.225(43,499 /10,150.4) = 0.964

E XZ = d(PZ / Q) = -895.3(12.50 / 10,150.4) = -1.10

3. a. The theory of demand predicts that price and quantity demanded will be inversely related.
Since b is negative, the estimate of b is consistent with economic theory.
b. Since c is negative, the good is an inferior good.
c. A positive coefficient of the price of related good R means that the price of R and the
quantity of X demanded are directly related. In other words, X and R are substitutes.
d. The p-values show all parameter estimates are significant at the 10 percent level, or
better.
e. Q = 11,408.60 - 432.59(48) - 0.0885(62,450) +126.35(250) = 16,705

E = b(P / Q) = -432.59(48 / 16,705) = -1.24

E M = c( M / Q) = -0.0885(62,450 / 16,705) = -0.33

EXR = d(PR / Q) = 126.35(250 /16,705) = 1.89

4. a. lnQ = 6.91- 0.86ln P - 0.75ln M -1.15ln P or Q = 1,002P-0.86 M -0.75 PR -1.15

b. Yes, the sign of b is negative, indicating demand is downward sloping.

c. Since the sign of c is negative, X is an inferior good. Goods X and R are complements
since d is positive.
d. The p-values show that a , b , and c are significant at the 5 percent level, while d is not
significant at the 5 percent level nor even the 10 percent level.
e. (1) = 0.86; (2) E M = 0.75; (3) E XR = 1.15
f. decrease; 2.63 percent (= +3.5% 0.75)
g. decrease; 5.16 percent (= +6% 0.86)
h. increase; 4.31 percent (= 3.75% 1.15)

Answers Chapter 8
1. a. 500; 500
b. Process Beta, since the total cost of using process Beta ($275,000) is less than the total
cost of process Alpha ($286,250).
c. Process Alpha, since the total cost of using process Alpha ($255,000) is less than the total
cost of process Beta ($262,500).
d. more; $320. Process Alpha is more labor intensive than Process Beta, so a high price of
labor makes Process Alpha less desirable relative to Process Beta. If the price of labor is
higher than $320, then Process Alpha will be more costly than Process Beta. To find the
wage rate threshold, w , above which Process Alpha cannot be economically efficient (as
long as the price of capital remains $1,500), you must solve the following inequality for
w:
w 625 + $1500 45 w 250 + $1,500 125
w $320
e. This statement is correct because, for two technically efficient processes, the one that
turns out to be economically efficient depends on which one has a lower total cost, which
in turn depends on the prices of labor and capital inputs. This Technical Problem is an
example of this relation.

2. a. Variable cost. The van will be driven more miles and burn more gasoline as the plumber
does more repair work.
b. Quasi-fixed cost. The cost of acquiring a complete set of plumbers tools is fixed since
performing more plumbing services does not require any new tools to be purchased. We
must also assume that these tools do not depreciate with use, otherwise the cost would not
be quasi-fixed. The tool cost is quasi-fixed because the plumber can avoid the cost of
these tools by selling them to another plumber at any time he wishes. Perhaps a part of
the cost of the tools is sunk since used tools usually sell for less than new tools, making a
portion of the tool cost sunk (i.e., unavoidable).
 c. Variable cost. The cost of the helper varies directly with the number of hours the helper is
hired.
d. Fixed cost. The lease payment is the same every month for 12 months no matter how
many plumbing repairs are undertaken (and even if the number of repairs is zero).
e. Fixed cost. The implicit opportunity cost of the owners time is fixed; it does not vary
with the number of plumbing repairs made.
f. Variable cost. The more plumbing services supplied, the more plumbing consumables
will be used.

3. a. Long-run decision. The acquisition of a new firm will add productive capacity to Adidas
by adding more of all inputs, including capital.
b. Short-run decision. Keeping the number of distribution centers constant and using them
more intensely is a short-run decision because Wal-Mart operates with the same amount
of capital but with this decision it now uses more labor.
c. Short-run decision. Production at GemCon is being cut by reducing labor employment.
d. Long-run decision. Adding a new a concourse to the airport represents a long-run
increase in an input that is fixed in the short run.

4. a. Avoidable cost. If Frito-Lay ceases production of any of its product lines, there will be no
more sales of that product and no more sales commissions.
b. Sunk costs. Since the FDA does not offer refunds if Frito-Lay later changes its mind, the
costs of winning FDA approval to treat cheese popcorn as a probiotic cannot be
recovered once they have been incurred.
c. Sunk cost. Set-up cost cannot be recovered if the firm later decides to cease production.
d. Sunk cost. Like set-up costs, legal fees cannot be recovered if the firm ceases production.

5. Your table should look like this:

Units of Total Average Marginal
labor product product product
1 500 500 500
2 1,200 600 700
3 2,000 666.67 800
4 2,500 625 500
5 2,800 560 300
6 2,970 495 170
7 2,905 415 65
8 2,824 353 81

6. Using 7 units of labor is technically efficient as long as 2,905 units of output is the maximum
possible output when 7 workers are employed with the fixed amount of capital associated
with this total product table. (Note: You are not told how much capital is being employed in
this table.) Using 7 units to produce 2,905 units of output not economically efficient because
the marginal product of the 7th worker is negative. Therefore, 2,905 units could be produced
 with less than 7 units of labor, which would represent a lower total cost of producing 2,905
units. Although you cannot see in the table exactly how much labor is needed to produce
2,905 units economically efficiently, it must be a value between 5 and 6 units of labor.

7a. When capital is held constant at 2 units:

L Q AP MP

1 300 300.00 300

2 345 172.50 45

3 380 126.67 35

4 435 108.75 55

5 475 95.00 40

When marginal product is greater than average product, average product is increasing.
When marginal product is less than average product, average product is decreasing.
b. Table of marginal products:
Marginal product of labor

L K=1 K=2 K=3 K=4

1 200 300 400 500

2 30 45 60 75

3 23 35 46 57

4 35 55 69 88

5 29 40 60 75

As the capital stock increases for each level of labor usage, the marginal product of labor
increases. The additional unit of labor is more productive because it has more capital with
which to work.
8. a. Completed table:
Total cost Average cost
Units of Units of Average Marginal Marginal
labor output product product Fixed Variable Total Fixed Variable Total cost
0 0 xx xx 12,000 0 12,000 xx xx xx xx
25 3,600 144 144 12,000 5,000 17,000 3.33 1.39 4.72 1.39
50 9,000 180 216 12,000 10,000 22,000 1.33 1.11 2.44 0.93
75 13,500 180 180 12,000 15,000 27,000 0.89 1.11 2.00 1.11
100 15,000 150 60 12,000 20,000 32,000 0.80 1.33 2.13 3.33
125 16,400 131.20 56 12,000 25,000 35,000 0.73 1.52 2.26 3.57

b. When SMC is less than (greater than) AVC, AVC is decreasing (increasing). When SMC is
less than (greater than) ATC, ATC is decreasing (increasing).
c. When AP is increasing (decreasing), AVC is decreasing (increasing). When MP is
increasing (decreasing), MC is decreasing (increasing).