Chapters 5 and 6 Study Guide

# Chapters 5 and 6 Study Guide - Chapters 5 and 6 Study Guide...

This preview shows pages 1–4. Sign up to view the full content.

Chapters 5 and 6 Study Guide 1. Assume a firm faces the following TC = 5,000 + 2Q + 4Q 2 . If the price is \$122, what quantity the firm should produce? Answer: To maximize profit, the firm should always produce where MR=MC. Assuming that this is a perfectly competitive firm, Price or P=MR , thus the firm should produce where P=MR=MC Thus, find MC from TC function If TC = 5,000 + 2Q + 4Q 2 = MC = 0 + 2Q 1-1 + (4x2)Q 2-1 = 2Q 0 + 8Q = 2 + 8Q Thus, for a perfectly competitive firm, the firm should produce where P=MR=MC If P=122 and P=MC, therefore 122 = 2 + 8Q 122 – 2 = 8Q 120 = 8Q Q = 120/8 = 15 To maximize profit, any firm whether perfectly competitive, monopolist, monopolist competition or oligopoly should produce where MR=MC 2. Example to compute MP Employees (L) Output (Q) MP L AP L 0 0 n/a n/a 1 20 20 20 2 45 25 22.5 3 60 15 20 4 70 10 17.5 5 75 5 15

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
- With one employee, the firm produces 20 units. - With 2 employees, the firm produces a total of 45 units. If the first employee produced 20 units, the second employee adds a Marginal Product of Labor (MP L ) of 25=(45 – 20 from the first employee). - With 3 employees, the firm produces a total of 60 units. The third employee adds a MP L of 15 units - With 4 employees, the firm produces a total of 70 units. The fourth employee adds a MP L of 10 units - With 5 employees, the firm produces a total of 75 units. The fifth employee adds a MP L of 5 units Average Product of Labor = AP L = Q/L 3. Assume a firm faces Total Cost function, TC=500 + 100Q + 4Q 2 a. If the firm produces 500 units, what is the firm marginal cost? Answer: From TC function, find MC MC = 0 + 100Q 1-1 + (4x2)Q 2-1 = 100Q 0 + 8Q = 100 + 8Q If Q = 500 Thus, MC = 100 + 8(500) = 100 + 4,000 = \$4,100 b. What is the firm average total cost? Answer: From TC function, the firm ATC = TC/Q = [500 + 100(500) + 4(500) 2 ]/500 = \$2,101 4. A monopolist firm faces a demand curve of P=5,000 – 4Q and a MC =2,000 + 2Q. To maximize profit, what is price and quantity? Answer: First compute TR = P * Q If P = 5,000 – 4Q TR = (5,000 – 4Q)Q
TR = 5,000Q – 4Q 2 From TR function, find MR. MR = 5,000Q 1-1 – (4x2)Q 2-1 = 5,000Q 0 – 8Q = 5,000 – 8Q To maximize profit, the monopolist firm must produce where MR = MC Thus, MR=MC 5,000 – 8Q = 2,000 + 2Q 5,000 – 2,000 = 2Q + 8Q 3,000 = 10Q Q = 3,000/10 = 300 To find P, replace Q in the P function P = 5,000 – 4(300) = 5,000 – 1,200 = \$3,800 Textbook examples 5–16. Mountain Springs Water Company produces bottled water. Internal consultants estimate the company’s production function to be Q = 300L 2 K, where Q is the number of bottles of water produced each week, L is the hours of labor per week, and K is the number of machine hours per week. Each machine can operate 100 hours a week. Labor costs \$20/hour, and each machine costs \$1000 per week. a.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This document was uploaded on 08/24/2011.

### Page1 / 15

Chapters 5 and 6 Study Guide - Chapters 5 and 6 Study Guide...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online