Week 6 Tutorial Questions 3 - Tutorial Questions for Week...

Tutorial Questions for Week 6 beginning 4
th
April
For Q2 and 3a you need to revise Perfect Competition concepts from First
Year. You will find them in slides 2-7 of Topic 4. Read those 6 slides to
refresh your memory. We will go over those concepts quickly in the lecture
using different cost function.
1. (Perloff) A bottling company uses two inputs to produce bottles of the soft drink Suldge:
bottling machines (K) and workers (L). The isoquants have the usual smooth shape. The
machine costs $1,000 per day to run: the workers earn $200 per day. At the current level of
production, the marginal product of the machine is an additional 200 bottles per day, and the
marginal product of labor is 50 more bottles per day. Is this firm producing at minimum cost?
If it is minimizing cost, explain why. If it is not minimizing cost, explain how the firm
should change the ratio of inputs it uses to lower its cost.
2. John’s Lawn Mowing Service is a small business that acts as a price taker. The
prevailing market price of lawn mowing is $20 per lawn. John’s costs are given by