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    Costs of machine tool manufacturer

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    Assume you own a machine tool manufacturing company that produces one standardized type of tool. Your total costs change as shown in the table below:

    Costs of machine tool manufacturer

    Quantity (thousands of machine tools per day) (2)
    Total Cost
    (thousands of dollars per day) (3)
    Average Cost
    (dollars per machine tool) (4)
    Marginal Cost
    (dollars per machine tool)
    0 $0 $ $
    1 5
    2 20
    3 60

    1. Fill in the rest of the columns in the cost table above.

    2. Graph the average and marginal costs curves for the firm. You can use the graph area below.


    0 1 2 3 4

    3. Your machine tool firm is characterized by which of the following market conditions:
    a. Economies of scale
    b. Constant returns to scale
    c. Diseconomies of scale
    d. None of the above, the cost information is applicable to only the short run.

    4. Explain your answer in #3.

    5. Explain why the free rider problem occurs for public goods but not for private goods. Give an example of a free rider public good.

    6. Consider a trout stream that is threatened with destruction by a nearby logging operation. Each of the 10,000 local fishers would be willing to pay $5 to preserve the stream. The owner of the land would incur a cost of $20,000 to change the logging operation to protect the stream.

    a. Is the preservation of the stream efficient from the social perspective? Why or why not?

    b. If the landowner has the right to log the land any way he wants, will the stream be preserved? Why or why not?

    c. What would be your solution to the problem and describe a transaction that would benefit the fisher and the landowner.

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    Solution Summary

    Costs of machine tool manufacturer problem is depicted step-by-step.