Explicit costs: $37,000 (= $12,000 for the helper + $5,000 of rent + $20,000 of materials). Implicit costs: $22,000 (= $4,000 of forgone interest + $15,000 of forgone salary + $3,000 of entrepreneurship).
Accounting profit = $35,000 (= $72,000 of revenue - $37,000 of explicit costs); Economic profit = $13,000 (= $72,000 - $37,000 of explicit costs - $22,000 of implicit costs).
(a) MC no change; AVC no change; AFC shift down; ATC shift down. (b) MC shift up; AVC shift up; AFC no change; ATC shift up. (c) MC shift down; AVC shift down; AFC no change; ATC shift down. (d) MC no change; AVC no change; AFC shift up; ATC shift up. (e) MC shift up; AVC shift up; AFC no change; ATC shift up.
175:10 Extra credit
The long-run ATC curve is U-shaped. At first, long-run ATC falls as the firm expands and realizes economies of scale from labor and managerial specialization and the use of more efficient capital. The long-run ATC curve later turns upward when the enlarged firm experiences diseconomies of scale, usually resulting from managerial inefficiencies.
The MES (minimum efficient scale) is the smallest level of output needed to attain all economies of scale and minimum long-run ATC.
If long-run ATC drops quickly to its minimum cost, which then extends over a long range of output, the industry will likely be composed of both large and small firms. If long-run ATC descends slowly to its minimum cost over a long range of output, the industry will likely be composed of a few large firms. If long-run ATC drops quickly to its minimum point and then rises abruptly, the industry will likely be composed of many small firms. [continues]
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