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Unformatted text preview: ECON 468: Industrial Organization Solution to Problem Set 1 February 25, 2008 1. The only factory of a small town employs workers for $5 an hour, for forty-hour weeks. The closest urban center is located at 1 hour driving, and the average comparable wage is $10 an hour (also for forty-hour weeks). If the commuting cost is $10 (one-way), what is the opportunity cost of working and living in the small-town factory? Definition of opportunity cost: Value of the best forgone alternative use of the resources employed in marking it. In this example, the opportunity cost corresponds to the value of working in the closest urban center: $10 40- (5 2) $10 = $300 . 2. A firm can choose between two production technologies for a new product line. If it installs technology 1, its yearly costs will be C 1 ( q ) = 10 + 2 q 2 . If it installs technology 2, its yearly costs will be C 2 ( q ) = 30 + q 2 2 . (a) What is the firms long-run average cost curve 1 ? The long-run average cost curve corresponds to the minimum of the two technologies average cost curves. The two technologies have two different minimum: q * 1 = 5 and A 1 = 4 5 q * 2 = 60 and A 2 = 60 . See Figure 1 below for a graphical representation. 1 You should use Excel or any other spreadsheet software to produce the graph....
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