Answers+to+review+problems+on+topics+after+second+midterm

Answers+to+review+problems+on+topics+after+second+midterm -...

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Answers to Review Problem 1 Economics 102 Professor Blair 1. Mary runs a small company, Footloose Boots, that manufactures hiking boots. The table below shows the total output of boots per month for different quantities of labor. a. Fill in column 3 by using the data in column 2 to compute the marginal physical product of each additional worker. b. Mary can sell boots for $60 a pair. Each boot contains $20 worth of leather, leaving $40 for wages or profits. Because Mary has a small firm, the price is unaffected by the quantity that she sells. Fill in column 4 by computing the marginal revenue product of each worker. Be sure to use the $40 net figure rather than the $60 gross. Number of Bootmakers Total Number of Pairs of Boots Per Month Marginal Physical Product (boots) Marginal Revenue Product (dollars) 0 0 60 2400 1 60 55 2200 2 115 50 2000 3 165 45 1800 4 210 40 1600 5 250 35 1400 6 285
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30 1200 7 315 25 1000 8 340 20 800 9 360 15 600 10 375 c. Mary is interested in maximizing profits. How many workers should she employ if monthly wages are $1100? She should employ seven workers, since up to that level of employment MRP L exceeds the wage rate. Thus each of the first seven workers adds more to TR than to TC. d. Show that your answer to Question c.) maximizes profits by computing total profits for one more and for one less worker. Denoting by P M the price of materials per pair of boots, Π = PQ - P L L - P M Q Π (L=6) = 60 x 285 - 1100 x 6 - 20 x 285 = 4800 Π (L=7) = 60 x 315 - 1100 x 7 - 20 x 315 = 4900 Π (L=8) = 60 x 340 - 1100 x 8 - 20 x 340 = 4800 e. The supply of bootmakers for the entire bootmaking industry is described by the equation w = 500 + 1/2 L, where w is the monthly wage and L is the number of workers. Plot the corresponding supply curve on a graph. Assume that there are 100 competitive firms just like Mary's. Using your data on the
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marginal revenue product for a typical firm, plot on the same graph the market demand for bootmakers. What is the equilibrium market wage and employment? w = 1200 and L = 700 How many workers should Mary employ? Either 6 or 7; they are equally profitable levels of employment What are Mary's profits? $4200 2. Consider a neighborhood with houses of two types; half the houses have wood siding and half are brick. They are otherwise identical. The houses with wood siding require painting every five years and have just been painted. Painting such a house costs $2,000. Brick houses never need to be painted. Assume that each house will last for forty more years.
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a. Suppose the interest rate is 8 percent. What is the present discounted value of the cost of the next required paint job on a house with wood siding?
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This note was uploaded on 03/08/2011 for the course ECON 220 taught by Professor Cai during the Spring '08 term at Rutgers.

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Answers+to+review+problems+on+topics+after+second+midterm -...

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