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Assignments & Exams
Course: Microeconomics: ECO-101-1709
Assignment: Assignment 4
OUTPUT AND COSTS
Average total cost
The data in the table above show the average total costs (per head of cattle) of
meatpacking firms of varying plant sizes in three different years. (MacDonald, James
M. and Ollinger, Michael E. Technology, Labor Wars, and Producer Dynamics:
Explaining Consolidation in Beef Packing. American Journal of Agricultural
Economics 87(4) (November 2005): 1020-1033.) The average cost numbers are
expressed as an index, using the 175,000 head plant size as the base, so a decrease in
the index is a decrease in average total cost.
Explain how these data indicates the existence of economies of scale in the beef
packing industry. Are there economies of scale for each of the three years?
Describe the general shape of the average cost curve that is implied by these
Compare the average costs across plant sizes in 1963 with those in 1977 and
1992. Were scale economies becoming more or less significant over time?
The authors of this study made the following assessment of production costs in the
beef packing industry:
Large plants have substantial fixed costs, due partly to capital intensity, and partly to
labor practices (weekly minimum hours guarantees to production workers). As a
result, short run processing costs at large plants rise sharply as volumes fall below
capacity, and packers require large and consistent flows of cattle before committing to
a large plant.
To capture the idea that there are substantial fixed costs, suppose that the formula for
the beef packers total cost is:
TC = $50,000,000 + $35 x Q
where Q is the number of cattle processed per year. This formula means that the fixed
cost is $50 million, but that once the plant is up and running, the marginal cost per
cattle processed is $35, regardless of the level of production.
a. Is this marginal cost curve from this cost formula consistent with the law of
diminishing returns? Explain.
b. Using the formula for the total cost, what is the formula for the average total
c. Is there a level of output for which the marginal cost equals the average total
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