Midterm & Final package

Midterm & Final package - UNIVERSITY OF WATERLOO -...

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UNIVERSITY OF WATERLOO -- Department of Economics -- Professor J. Cuenca Economics 201: Problems and Questions for the Second Term Test 1. A profit maximizing firm whose production function is given by X = (K - 1) 1/3 (L + 4) 1/6 , employs in equilibrium 2 units of K and 60 units of L, with a total cost of $158 at the fixed prices current in a perfectly competitive market. Calculate the prices at which the inputs K and L were bought. [In case you have no calculus: MP K = [ (K - 1) -2/3 (L + 4) 1/6 ] /3, and MP L = [ (L + 4) -5/6 (K - 1) 1/3 ] /6. 2. The average-variable-cost function of a profit maximizing firm under perfectly competitive conditions is: AVC = 2X 2 - 10X + 36. The firm's marginal costs are given by MC = 6X 2 - 20X + 36. Calculate the fixed costs (TFC) knowing that, if the price of X were Px = 260, the firm's economic profit would be π =1300. [Hint : calculate the output level that maximizes profits at Px = 260; then recall that π = TR - (TVC + TFC) ]. Answer : TFC = 108 3. John's Lawn Mowing Service is a small business that acts as a price taker (i.e., MR = P). The prevailing market price of lawn mowing is $20 per acre. John's total costs are given by TC = 0.1 X 2 + 10X + 50,
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Midterm & Final package - UNIVERSITY OF WATERLOO -...

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