1. The owner of a small retail store does her own accounting work. How would you measure the opportunity cost of her work?
2. Please explain whether the following statements are true or false.

1. If the owner of a business pays himself no salary, then the accounting cost is zero, but the economic cost is positive.
2. A firm that has positive accounting profit does not necessarily have positive economic profit.
3. If a firm hires a currently unemployed worker, the opportunity cost of utilizing the workers services is zero.

3. Suppose that labor is the only variable input to the production process. If the marginal cost of production is diminishing as more units of output are produced, what can you say about the marginal product of labor?
4. Assume that the marginal cost of production is increasing. Can you determine whether the average variable cost is increasing or decreasing? Explain.
5. Assume that the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing? Explain.
6. If the firms average cost curves are U-shaped, why does its average variable cost curve achieve its minimum at a lower level of output than the average total cost curve?
7. If a firm enjoys economies of scale up to a certain output level, and cost then increases proportionately with output, what can you say about the shape of the long-run average cost curve?
8. Joe quits his computer programming job, where he was earning a salary of $50,000 per year, to start his own computer software business in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the following expenses: salary paid to himself, $40,000; rent, $0; other expenses, $25,000. Find the accounting cost and the economic cost associated with Joes computer software business.

9. a. Fill in the blanks in the table

Units of Output	Fixed Cost	Variable Cost	Total Cost	Marginal Cost	Average Fixed Cost	Average Variable Cost	Average Total Cost
0	100	0
1	100	25
2	100	45
3	100	57
4	100	77
5	100	102
6	100	136
7	100	170
8	100	226
9	100	298
10	100	390

2. Draw a graph that shows marginal cost, the average variable cost, and average total cost, with cost on the vertical axis and quantity on the horizontal axis.

10. Suppose a firm must pay an annual tax, which is a fixed sum, independent of whether it produces any output.

1. How does this tax affect the firms fixed, marginal, and average costs?
2. Now suppose the firm is charged a tax that is proportional to the number of items it produces. Again, how does this tax affect the firms fixed, marginal, and average costs?

11. A recent issue of Business Week reported the following:

During the recent auto sales slump, GM, Ford, and Chrysler decided it was cheaper to sell cars to rental companies at a loss than to lay off workers. Thats because closing and reopening plants is expensive, partly because the automakers current union contracts obligate them to pay many workers even if theyre not working.

When the article discusses selling cars at a loss, is it referring to accounting profit or economic profit? How will the two differ in this case? Explain briefly.