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Managerial Economics MGCR 293 Practice Questions for Final Examination Report any errors or corrections 1) The Lamour Manufacturing Company’s short-run average cost function in 2001  is: AC = 5+6Q, Where Ac is the firm’s average cost (in dollars per unit of the  product), and Q is its output rate. a. Obtain an equation for the firm’s short-run total cost function. b. Does the firm have any fixed costs? Explain. c. If the price of the Lamour Manufacturing Company’s product (per pound) is  \$2, is the firm making profits or losses? Explain. Solutions: a. Because the total cost equals the average cost times the output, the firm’s total cost function is: TC=AC × Q= 5Q + 6Q 2 b. No, since total cost equals to zero when Q=0 c. If price is \$2 then total revenue (TR) equals 2Q. Thus, the firm’s profit equals: π = TR-TC=2Q-(5Q+6Q 2 )=-3Q-6Q 2 If Q is greater than zero, π must be negative, and therefore means the firm is incurring losses. If the firm is producing nothing, it is incurring neither profits nor losses. Thus, the firm is better off producing nothing. --------------------------------------------------------------------------------------------------------------- 2) Jacob’s total variable cost function has been calculated to be  TVC = 100Q + 30Q² - Q³, where Q is the number of units of output. a. When marginal cost is a minimum, what is the output level? Marginal cost = dTVC/dQ = 100 + 60Q -3Q² dMC/dQ = 60 - 6Q = 0 6Q = 60 Q = 10 Therefore, the output level is 10 units. b. When average variable cost is a minimum, what is the output level? Average variable cost = TVC/Q = 100 + 30Q - Q² It is a minimum when dAVC/dQ = 30 - 2Q = 0, Q = 15 Therefore, the output level is 15 units. 1

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c. What is the average variable cost and marginal cost at output of b? a. Marginal cost = 100 + (60×15) - (3×225) = 100 +900 - 675 = \$325 b. Average Variable Cost = 100 + (30×15) – (225) = 100 + 450 - 225 = \$325 d. If Jacobs’s produces 3000 shirts and 2000 pants a year, the total cost is  \$100,000. If it produced only 3000 shirts, the cost would be \$80,000. If it  produced only the pants, it would be \$30,000. What is the degree of  economies of scope (S)? S = C(Q1) + C(Q2) – C(Q1 + Q2) C(Q1 + Q2) = 80,000 + 30,000 – (100,000) 100,000 = 0.10 which is 10%. _______________________________________________________________________ 3) Vogue Inc, an international fashion Magazine is developing a special edition for  pregnant women interested in buying maternity clothing. The cost of developing the  special edition is \$100 000. Vogue receives \$150 000 from clothing sponsors in  return for advertising in the catalogue. The cost (excluding developing costs) of  printing and advertising each magazine is \$2.50.
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