BUAD 351  Economic Analysis for Business Decisions
Homework 3
due: Wed 03/05/2008
PART (i): multiple choice
question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
answer
b
c
b
c
d
d
d
c
d
d
b
c
a
b
d
PART (ii): Longer questions
1.
Suppose a °rm±s shortrun production function is given by
Q
= 3
p
L;
where
L
is the num
ber of hours of labor employed. The °rm has a sunk cost of $500 and the wage rate is $18. What is
the °rm±s shortrun (total) cost function?
Q
= 3
p
L
so
L
units of labor produce
Q
2
=
9
units of output. Thus, the shortrun cost function is
given by
C
(
Q
) = 500 + 2
Q
2
2. De°ne the e¢ cient production frontier and the production function
E¢ cient production frontier contains the combinations of inputs and outputs that the °rm can
achieve using e¢ cient production methods. A production function is a mathematical representation
of this relationship. Output=R(Inputs).
3. Suppose you are facing a downwardsloping inverse demand curve,
P
=
P
(
Q
)
:
De°ne the marginal
revenue curve. What two e/ects enter the determination of marginal revenue?
The marginal revenue curve is the change in total revenue that results from increasing output "a
little bit". That is, given that the total revenue can be written as
TR
(
Q
) =
Q
°
P
(
Q
)
;
marginal
revenue is the derivative of the total revenue curve,
MR
(
Q
) =
dT R
(
Q
)
dQ
;
which gives the slope of the total revenue curve at any level of output.
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 Spring '07
 Eastin
 Economics, Business, optimal positive output

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