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( ) (b) Derive ABC’s (longrun) cost function. Please show all calculations below and state any assumptions.
(c) This question should be answered independently of all other questions (i.e. the numbers given here for
and
are for this question only). Suppose
and can be either $20 with probability ¾ or $40 with probability
¼. Calculate ABC’s expected cost of carrying passengers. Please show all calculations below.
(d) Derive ABC’s average cost function. What is the Minimum Efficient Scale (MES)? Please show all calculations below
and state any assumptions.
(e) What is the impact on ABC’s optimal cost if the target passengers increases by 1 passenger? Please show all
calculations below.
(f) What is the impact on ABC’s optimal cost (in percentage terms) from a 1% increase in target passengers? Please show
all calculations below.
(g) What is the impact on ABC’s optimal cost (in percentage terms) from a 1% increase in wages? Please show all
calculations below.
(h) Does ABC’s technology have economies of scope? Should it merge with another bus company with an identical
technology? Please show all calculations below.
(i) Assume that ABC is a rational competitive firm with a capacity of 1,000 passengers a day. Denote the price of bus
tickets by . Suppose
Solve the profit maximization problem: For what range of wages ( ) will ABC choose to sell no tickets, one thousand tickets, and between zero and 1,000
tickets? Show all calculations.
(12.14) Assume that Ajax Inc. owns capital that it uses to produce output. The company purchased capital at
the
purchase price of the capital was ( ) and capital has a lifetime of periods. Denote the opportunity cost rate of return
in period by ( ).
7
ECO 204 Chapter 12: Practice Problems & Solutions for The Long Run Cost Minimization Problem in ECO 204 (this version 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (a) Suppose this company uses straight line deprecation methods. What is , t...
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This document was uploaded on 01/19/2014.
 Fall '14

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