hw6 - 174 Part 2 Microeconomics: Consumers and Firms .5 3....

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Unformatted text preview: 174 Part 2 Microeconomics: Consumers and Firms .5 3. 3 g ,4 7. Profit-maximizing level of output for all 1. TC = TFC + TVC 4. AVG = TVC/q firms- MR = MC 2' AFC = TFC/q 5' ATC = TC/q = AFC + AVC 8. Profit-maximizing level of output for 3. Slope of TVC = MC 6. TR = P X q perfectly competitive firms: P = MC Fawl 9 How<vJ°'/L‘ I 3/ 7 ‘2 I a C 101) 3 PROBLEM SET 1. Consider the following costs of owning and operating a car. A $15,000 Ford Taurus financed over 5 years at 10 percent interest means a monthly payment 0f $3 18'71‘ Insurance COS“ $100 a 4. Do you agree or disagree with each of the following statements? month regardless of how much you drive. The car gets 20 miles Explain your reasons. per gallon and uses unleaded regular that costs $1.50 per gallon. a_ For a competitive firm facing a market price above average Fmally suPpose that wear and tear on the ‘3“ C05“ a§°ut 15 total cost, the existence of economic profits means the firm cents a mile. Wthh costs are fixed and Wthh are variable? What Should increase output in the short run even if Price is below is the marginal cost of a mile driven? In deciding whether to marginal cost. drive from New York to PlttSburgh (abom 1’000 mlles mund' . If marginal cost is rising with increasing output, average cost e. If output price was $57, how many units of output would the firm produce? Explain. trip) to visit a boyfriend, which costs would you consider? Why? . You are given the following cost data. Assume that you cannot produce fractions of a unit. must also be rising. . Fixed cost is constant at every level of output except zero. When a firm produces no output, fixed costs are zero in the Q TFC TVC short run. 12 0 12 5 12 9 12 14 12 20 12 28 12 38 A firm’s cost curves are given by the following table: TC TFC TVC ATC MC $100 $100 130 100 150 100 160 100 172 100 185 100 210 100 240 100 280 100 330 100 390 100 AVC 05" If the price of output is $7, how many units of output will this firm produce? What is total revenue? What is total cost? Will the firm operate or shut down in the short run, or in the long run? Briefly explain. OOWVOUIQWNi—IO The following table gives capital and labor requirements for 10 different levels of production: ._‘ . Complete the table. . Graph AVC, ATC, and MC on the same graph. What is the relationship between the MC curve and ATC, and between MC and AVC? . Suppose that market price is $30. How much will the firm 12 produce in the short run? How much are total profits? 15 . Suppose that market price is $50. How much will the firm 19 produce in the short run? What are total profits? 24 . Suppose that market price is $10. How much would the firm 14 30 produce in the short run? What are total profits? 16 37 18 45 20 54 v: . A 2001 Michigan graduate inherited her mother’s printing com— pany. The capital stock of the firm consists of three machines of various vintages, all in excellent condition. All machines can be running at the same time: \DOOVOU‘ubUJNb—‘O ._a O . Assuming that the price of labor (PL) is $5 per unit and the price of capital (PK) is $10 per unit, compute and graph the total variable cost curve, the marginal cost curve, and the average variable cost curve for the firm. . Do the curves have the shapes that you might expect? Explain. . Using the numbers here, explain the relationship between marginal cost and average variable cost. . Using the numbers here, explain the meaning of “marginal Maximum Total Printing and Capacity (Books) Binding per Book per Month $1.00 100 2.00 200 3.00 500 Cost of Machine 1 Machine 2 Machine 3 cost” in terms of additional inputs needed to produce a mar- ginal unit of output. a. Assume that “cost of printing and binding per book” includes all labor and materials, including the owner’s own wages. iWEB EXERCISES 9-. ...................................................................... .. Assume further that Mom signed a long-term contract (50 years) with a service company to keep the machines in good repair for a fixed fee of $100 per month. (1) Derive the firm’s marginal cost curve. (2) Derive the firm’s total cost curve. b. At a price of $2.50, how many books would the company produce? What would total revenues, total costs, and total profits be? 7. The following curve is a production function for a firm that uses just one variable factor of production, labor. It shows total out- put, or product, for every level of inputs: a. Derive and graph the marginal product curve. b. Suppose that the wage rate is $4. Derive and graph the firm’s marginal cost curve. c. If output sells for $6, what is the profit-maximizing level of output? How much labor will the firm hire? Total product Total output 0 100 200 300 Units of labor 8. Elena and Emmanuel live on the Black Sea in Bulgaria and own a small fishing boat. A crew of four is required to take the boat out fishing. The current wage paid to the four crew members is a total of 5,0001evs per day (a lev is the Bulgarian unit of cur- rency). Assume that the cost of operating and maintaining the boat is 1,0001evs per day when fishing, and zero otherwise. The following schedule gives the appropriate catch for each period during the year: Catch Per Day Period (kilograms) Prime fishing: 180 days 100 Month 7: 30 days 80 Month 8: 30 days 60 Rest of the year 40 The price of fish in Bulgaria is no longer regulated by the gov- ernment, and is now determined in competitive markets. Suppose that the price has been stable all year at 80 levs per kilo- gram. a. What is the marginal product of a day’s worth of fishing dur- ing prime fishing season? During month 7? During month 8? 1. Suppose you live in San Francisco and are planning a business trip to Chicago. As you are making your reservation you have an idea. How much would it cost to visit your old college room— mate in Columbus, Ohio? Go to http://www.yahoo.com and click on “Travel” and again on “Air.” Price out a round-trip ticket from San Francisco (SEC) to Chicago (0RD) more than a month in advance with a Saturday night stay over. Next, go back Chapter 7 Short-Run Costs and Output Decisions 175 b. What is the marginal cost of a kilogram of fish during prime fishing season? During month 7, during month 8, and during the rest of the year? c. If you were Elena and Emmanuel, how many months per year would you hire the crew and go out fishing? Explain your answer using marginal logic. For each of the following businesses, what is the likely fixed fac- tor of production that defines the short run? a. Potato farm of 160 acres b. Chinese restaurant c. Dentist in private practice d. Car dealership e. Bank 10. A producer of hard disk drives for notebook computers cur— rently has a factory with two disk—pressing machines, which it cannot change in the short run. Each of the machines costs $100 per day (the opportunity cost of the funds used to buy them). Each hired worker costs $50 per day. The relationship between output and the number of workers is as follows: TF C TVC TC AFC AVC ATC MC 0 1.. llll llllllll b—lb-ID—I OOUIOO N 00 36 48 llllllll \IO‘lelphUJNv—IO N N a. Fill in the columns for total fixed cost (TFC ), total variable cost (TVC), total cost (TC), average fixed cost (AFC), average variable cost (AVC), average total cost (ATC ), and marginal cost (MC). b. Verify that the two alternative methods of figuring ATC (TC/q and AVC + AFC) give the same answer (except for rounding). c. Over what range of output are there decreasing marginal costs, increasing marginal costs, increasing returns to labor, and diminishing returns to labor? d. At which level of output is AVC minimized? At which level is ATC minimized? e. Suppose this firm operates in a perfectly competitive output market and can sell as many disk drives as it wants for $410 each. In the short run, what is the profit-maximizing level of output for this firm? f. Does the profit-maximizing output level you found in e. minimize average total costs? If not, how could the rm be maximizing profits if it is not minimizing costs? and click on multi-city and price out a ticket. from San Francisco to Chicago on to Columbus (CMH) and back to San Francisco, spending three days in Columbus. What is the marginal cost of visiting your friend in Columbus? 2. Have you ever wondered how much it would cost to own your own McDonald’s restaurant? Imagine that you are thinking of £1, 3 ...
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This note was uploaded on 06/20/2008 for the course EC 201 taught by Professor Xasdf during the Summer '08 term at N.C. State.

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hw6 - 174 Part 2 Microeconomics: Consumers and Firms .5 3....

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