1. Suppose that a small hair styling salon had revenues of $150,000 in a given year. The owner spent $10,000 on utilities, $60,000 on supplies (shampoo, conditioner, hair coloring and other chemicals, etc.), and $50,000 on equipment (mirrors, chairs, scissors, curling irons, etc.), including maintenance. The owner could have earned $50,000 working at another

salon. a.


(5 Points) Calculate the accounting and economic profit for the hair styling salon. Show your

Based on your answers in part (a), should the owner close this salon or continue with it?

  1. “If not for the law of diminishing returns, all the food that the world needs could be grown in a flowerpot.” Do you agree, disagree, or agree in part? Suggestion: Think of land as the only fixed factor and fertilizer as the only variable factor. How much food could you grow in the flowerpot if the marginal physical product of fertilizer were constant regardless of the amount used per unit of land?) (3 Points)
  2. Data from Betty’s Bakery: Fill in the blanks using the relationships between various costs. (7 Points)

Quantity of cakes

Fixed Cost

Variable Cost

Total Cost

Average Fixed Cost

Average Variable Cost

Average Total Cost

Marginal Cost


































Based on your numbers, draw diagrams showing the following:

  1. FC and AFC against the output
  2. AVC and ATC against the output
  3. MC against the output.


ECON 2103: Problem Set 4 Prof. Jog 4. Consider the following table of long-run total costs for four different firms: (5 Points)

  1. Which firm shows constant returns to scale over the entire range of output? Show your work.
  2. Which firm has diseconomies of scale over the entire range of output? Show your work.
  3. Which firm has economies of scale over the entire range of output? Show your work.
  4. Which firm’s long-run marginal cost decreases as output increases? Show your work.
  5. Firm 4’s efficient scale occurs at what amount of output? Show your work.