ps6 301 f06_ProblemSet

# ps6 301 f06_ProblemSet - Econ 301 F06 PROBLEM SET 6 DUE...

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Econ 301 – F06 PROBLEM SET 6 – DUE FRIDAY NOVEMBER 17 in class Wissink 1. Critically evaluate the following statements and explain to what extent they are true, false, or uncertain. a) A firm operating at an output level where marginal revenue equals marginal cost must be maximizing profits. b) If marginal cost equals marginal revenue, then the firm is not making any losses. c) If an entrepreneur's firm is earning positive accounting profit, then it must be earning non- negative economic profit. d) It's silly to argue that in the long-run firms in perfectly competitive industries earn zero economic profit, for if there's no profit to be made in the industry, no one would bother being "in" the particular industry. e) To profit maximize firms should minimize their costs, that implies firms should produce nothing for then costs will be as small as they can possibly get. f) All fixed costs are sunk costs. 2. Mr. Joe Smith is a local bottler of Coke. He already owns two plants for turning cola syrup into Coke and putting it in bottles. The plants are not exactly the same. The marginal cost schedules for each of the two plants are as follows: PLANT A PLANT B units of output \$marginal cost units of output \$marginal cost 0 0 1000 \$100 1000 \$200 2000 \$200 2000 \$400 3000 \$300 3000 \$600 4000 \$400 4000 \$800 5000 \$500 5000 \$1000 6000 \$600 6000 \$1200 Notes: Coke can only be bottled in increments of 1000 bottles. The schedule should be read as follows: for example, in plant A the marginal cost of increasing production from 1000 bottles to 2000 bottles is equal to \$200. Mr. Smith already owns both plants and can use which ever one he wants, or both. a) Suppose Joe wants to produce only 1000 bottles, what is the cost efficient way to organize production? That is what plants should be used? b) Suppose Joe wants to produce 2000 bottles, what is the cost efficient way to organize production? That is, how many bottles should be produced in each plant? c) Suppose Joe wants to produce 3000 bottles, what is cost efficient way to organize production? d) Suppose the demand curve facing Joe is completely elastic at the price of \$400/thousand. What is the profit maximizing level of output and price for Mr. Smith and how would production be organized? e) What general rule comes out of this problem for how production should be organized when a production manager has to deal with several plants of possibly different sizes.

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f) How would your answers change if the marginal cost in plant A is constant and equal to \$100 regardless of how many bottles are filled, and the marginal cost in plant B is constant and equal
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ps6 301 f06_ProblemSet - Econ 301 F06 PROBLEM SET 6 DUE...

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