monopoly-question-from-review-lecture-revised

monopoly-question-from-review-lecture-revised - Bill the...

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Bill the Inventor came up with the next great thing: a solar powered hula-hoop (SPHH). He patented his invention so that nobody else could produce it for the next 30 years. a. Bill figured that it will take 1/2 an hour of labor and 5 minutes with the plastic molding machine to produce each SPHH. To house the machines and the employees, Bill rented a warehouse for which the yearly lease is $200. If the hourly wage of labor is $20 and an hour of the plastic molding machine costs $60, what is the cost function for producing SPHHs? The production technology described in the question is a fixed proportions technology, given by Q=min(2L, 12K), where L are hours of labor and K are hours of machine. The isoquants for producing Q=1 and Q=2 are given in the following graph: 0 5 10 15 20 25 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 L (hours) K (minutes) q=1 q=2 The minimal variable cost of production for one unit is VC(1)=20/2+60/12=15. For two units it is VC(2)=20+60/6=30, etc… The cost function is then the fixed cost of
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