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Eco Skelton 3301 Homework 4 Answers 1. A) This increases MC, so it will impact price. B) This is equivalent to part A; either one increases (marginal) production costs, so price is affected. C) This is a fixed cost, so it has no impact unless it drives the business to shut down. D) This is different than part C because it impacts all restaurants. So, for Upton, it could cause him to shut down. Also, if it causes other restaurants to close, then it would increase the demand for Upton s restaurant and allow him to raise prices. E) This cost is sunk so will have absolutely no impact on the restaurant. F) This will cause a decrease in demand and therefore quantity and price will fall as well (along with marginal revenue). 2. If the benefits are still $1.5 billion and the cost of continuing is $1.2 billion then the project should be completed. 3. Plan A affects variable cost and therefore price. Plan B affects a fixed cost and hence does not affect price. The patients will benefit from Plan A but not Plan B. 4. In this case, the firm could increase the number of hours worked (or employees hired, depending on how you interpret the question) and decrease capital (until MRTS = w/r). They could spend the same amount of money but increase output. The obvious reason for doing so is that they could produce more output for the same cost, which would increase profit. The MRTS is defined as the ratio of the marginal two products (MRTS = MPL/MPK). Here, we are given the marginal product of labor and the MRTS. So, we solve for .25 = 50/MPK, so the marginal product of capital is 200 chips per hour. The isoquant identifies all the combinations of the two inputs which can produce the same level of output. The slope of the isoquant at any given point measures the curvature of the isoquant. The slope of the isoquant measures the rate at which the two inputs can be exchanged and still keep output constant, called the marginal rate of technical substitution. Along the typical, convex (or bowed in ) isoquant, the MRTS diminishes as you move down along the isoquant. Just like we discussed in class, this mirrors the analysis of diminishing MRS for indifference curves. 5. 6. 7. A) They are hyperbolas with equations K*L = 1, 4, 9, 16 B) Total output would be 10 and the MRTS would be 6.25 (capital of 25 divided by labor of 4) C) Short-run cost = 25 + 4L; long-run cost = K + 4L D) The firm will hire 5 workers and 20 units of capital. Total long-run cost will be $40, compared to short-run cost of $41. Obviously, by decreasing the amount of capital, total costs have decreased (not surprising because MRTS was not equal to w/r in the shortrun). E) Constant you can see this by setting K=L=1 and then K=L=4. This results in quantity rising from 1 to 4; we ve quadrupled inputs and exactly quadrupled output.

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