Firm Costs and Production: Are we in the same boat?

This is suitable for principles of microeconomics after covering the theory of the competitive firm in the short and long run, including types of profit. It should take 20-40 minutes and has no special requirements. This question would be given after readings and/or videos on cost curves, profit maximization, market structure, discussion the assumptions of perfect competition, and the concepts of accounting, normal and economic profit.

Overview

Students will participate in a mock firm decision making process. They confront the increase in the price of an input used in "their firm" and will need to use cost, profit and other concepts to make the best decision for the firm.

Expected Student Learning Outcomes

Students will learn to apply the ideas of marginal, average variable and average total costs, long run, short run, economic and normal profits to address a question that will determine the survival of their firm.

Information Given to Students

firm costs and production (Microsoft Word 2007 (.docx) 17kB Jul10 18)

This problem is a "nuts and bolts" type of question after students are prepared with costs and profit concepts. Instructors will have to provide some additional background in order for students to see the importance.

There are many concepts inherent in this problem as stated. Instructors may want to announce in advance that students provide graphs of cost curves and completely outline their understanding of how types of profits play a role in their decision.

Full disclosure: I have not used this problem, but would.

I would expect students should demonstrate:

-the importance of input prices to marginal and average total costs

-the effect of input prices on average variable costs -the effect of costs on profits

-the short run/long run distinction and its relevance

-understanding of how zero profits in the long run apply to this case (that in long run equilibrium, there would be no economic profit, economic profit or loss is a signal to enter or exit the market etc).

-how normal profit applies

-note that for the problem distributed to students c and d are acceptable, but a and b are incorrect. That raises a dilemma that often arises in a team based learning format: you want to prompt students to think for themselves, but you don't want them to misconstrue, misunderstand, or incorrectly apply models.

Choices a and b suggest economic profit, but that would not exist in long run equilibrium and thus are incorrect unless under unusual circumstances.

-the instructor needs to therefore think carefully and may want to modify the assumptions I have provided here (e.g. competitive markets starting in long run equilibrium ), or consider how to advise students who chose a or b.

-also relevant to the problem as currently constructed (there is more than one admissible answer): This allows for the full advantages of TBL to be realized. You may however think this will obscure or obfuscate key concepts, especially early in the students' comprehension of economics.

-if the previous point applies, I recommend modifying the answers so that only one correct answer remains. As the problem is posed, you may be able to do so with little difficulty [for example here, you could insert under point c "We would continue to produce in the short run even if the price falls below the minimum of AVC", rendering c incorrect and d the only answer admissible]. For at least the first eight weeks of a principles course, this is my own inclination. The trade-off is that the full benefits of TBL may not be realized (see http://www.teambasedlearning.org).

-if you do wish to have multiple allowable answers, you will no doubt want to think carefully about how to guide students studying for a test where specific correct answers are expected.

- how will you move between the ambiguity of the TBL problem and an exam? There may well be ways to navigate this (see my next point), but I recommend addressing this well in advance of the test. I don't wish to be condescending in my remarks on this, but not resolving this issue can result in disgruntled, cynical student reactions that impair learning, the opposite from what we are striving for.

How to navigate ambiguity and still have student know basics? Perhaps it implies different sections of a test, one where pure knowledge is tested (concepts, models, assumptions underlying models, implications of violating assumptions etc.), and a section where interpretation is stressed. The individual instructor of course is the best judge of how to handle this, I only wish to raise the alert in advance.

Test questions