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Unformatted text preview: Quiz 2 Solutions Sections 301 Economics 101 1. The chart below shows the number of customers that Sweetwaters can serve per day with different combinations of workers and espresso machines. What can you say about Sweetwaters production? 20 workers 40 workers 60 workers 2 espresso machines 300 400 550 3 espresso machines 390 550 750 4 espresso machines 450 650 900 (a) It exhibits increasing returns to scale (b) It exhibits constant returns to scale (c) It exhibits decreasing returns to scale (d) There are increasing marginal product of espresso machines (e) There is decreasing marginal product of labor ANSWER: Sweetwaters has increasing returns to scale. If we double both worker (from 20 to 40) and espresso machines (from 2 to 4) we more than double the number of customers they can serve (300 to 650). (Answer A) 2. Consider Zingermans, a competitive bread backing firm. The marketing people are concerned that the firm is not maximizing profits. You are hired to advise Zingermans and youre given the follow- ing information about the current operation of Zingermans breads. Given this information, what should Zingermans do? Profit = $200 Quantity = 100 Variable Cost = $1,000 Average Fixed Cost = $3 Marginal Cost = $14 and upward sloping (a) Zingermans is producing the profit maximizing number of loaves of bread - dont change behavior. (b) Zingermans should increase its production of bread for a larger profit. (c) Zingermans should decrease its production of bread for a larger profit. (d) Zingermans should shut down immediately. (e) Zingermans should stay open in the short run but plan to exit in the long run. ANSWER: 1 TC = V C + FC TC = 1000 + 3(100) = 1300 TR = TC + TR = 1300 + 200 P = TR Q = 1500 100 = 15 Since P > MC and marginal cost is upward sloping if we increase quantity then our MC will go up. Optimally, we want P = MC , so we should increase output. (Answer B) 3. The cost curves shown below are for Mysore Woodlands Indian Food, a competitive firm. Currently, Mysore sells 100 meals a day at a price of $6 per meal....
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