Sample Hourly 2

# Sample Hourly 2 - Hourly 2 Sample Exam Questions 1 Suppose...

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Hourly 2 Sample Exam Questions 1) Suppose that the University of Michigan is planning to build 2000 new dormitory rooms. The current plan developed by your company, Lowcost Construction, would use 20 acres of land and 100 tons of cement to produce the 2,000 dormitory rooms. (The 100 tons of cement is the lowest amount of cement that can produce 2000 dormitory rooms given that you are using 20 acres of land.) Suppose that, with these input quantities, the marginal product of land would equal 60 per acre and the marginal product of cement would equal 4 per ton. Also, the average product of land would equal 100 (2000/20) and the average product of cement would equal 20 (2000/100). Land costs \$120 per acre and cement costs \$12 per ton. a) You think that your company will not get the contract unless it can lower total costs. Based on the information above, how can you lower your total costs. Should you increase land and reduce cement? Should you reduce land and increase cement? Should you reduce both or should you increase both? Explain your answer thoroughly using an appropriate diagram. b) Suppose that L* and C* are the cost minimizing choices of land and cement from part (a). Suppose also that, because of a boom in the construction market, the price of land increases to \$132 per acre and price of cement increases to \$13.20 per ton. Since land is now more expensive, should Lowcost Construction use less land to produce the 2,000 dormitory rooms? Since cement is now more expensive, should Lowcost Construction use less cement to produce the 2,000 dormitory rooms? Explain your answers thoroughly using an appropriate diagram. c) Suppose again that L* and C* are the cost minimizing choices of land and cement from part (a) and TC L* is total land costs. Instead of (b), suppose now that the price of land increases to \$132 per acre but the price of cement remains the same. Will total land costs rise by exactly 10 percent of TC L* , more than 10 percent, or less than 10 percent? What will happen to your total costs? According to your manager, any increase in land costs will be offset by using more cement and

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## This test prep was uploaded on 03/26/2008 for the course EC 16 taught by Professor Loury during the Fall '07 term at Tufts.

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Sample Hourly 2 - Hourly 2 Sample Exam Questions 1 Suppose...

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