input. Equations (7.24) may be expressed as (7.25a) (7.25b) Equations (7.24) are
easily interpreted. Equation (7.24a), for example, says that a firm will hire
additional incremental units of capital to the point at which the additional
revenues brought in

another good. KEY TERMS AND CONCEPTS Average fixed cost (AFC) Total fixed cost
of production per unit of output. AFC is total fixed cost divided by total output
(i.e., AFC = TFC/Q). Average fixed cost is a short-run production concept. It is the
average c

move to the left. c. If the rental price of capital falls, the solution of the isocost line
for K shows that the isocost line will rotate clockwise. In other words, the L
intercept will remain unchanged while the K intercept will move up. d. If the
operat

framework will be expanded in subsequent chapters to take into consideration
alternative market structures and operating environments. This chapter will
consider the decision-making process with respect to two organizational
objectives: profit maximizatio

production. Key Terms and Concepts 261 CHAPTER QUESTIONS 6.1 Explain the
difference between marginal cost and incremental cost. 6.2 Marginal cost is the
cost of producing the last unit of output. Do you agree? If not, then why not. 6.3
Consider the produc

production are substitutable. The substitutability of the factors of production was
illustrated diagrammatically with the use of an isoquant map, with each isoquant
corresponding to a different level of output. By contrast, the long run in
production was

300 Profit and Revenue Maximization Take the first derivative of the total profit
function, set the result equal to zero, and solve. To verify that this is a local
maximum, the second derivative should be negative. If Wren and Skimpy select
the first cont

yields the monopolists total profit function, that is, Differentiating this expression
with respect to Q and setting the result equal to zero (the first-order condition for
maximization) yields Solving this expression for Q yields The second-order
conditi

Economies and Diseconomies of Scale 255 dis proportionately.The result is that
diminishing returns to scale set in, and per-unit costs rise. In other words, growth
usually is accompanied by diseconomies of scale. MULTIPRODUCT COST
FUNCTIONS We have thus f

minimum cost of producing various output levels given market-determined factor
prices, and the firms budget constraint. Although cost is largely the domain of
accountants, to an economist the concept carries a somewhat different
connotation. Economists ar

Rearranging, this expression becomes (7.6) Equation (7.6) says that at point C, the
marginal product of labor per dollar spent on labor is less than the marginal
product of capital per dollar spent on capital. It should be clear, therefore, that by
reallo

dTR/dQ) equals marginal cost (MC = dTC/dQ). Alternatively, a firstorder condition
for the firm to maximize profits is to select an output level for which marginal
profit (Mp = dp/dQ) is zero. To ensure that the solution value for Equation (7.10)
maximizes

referred to as the expansion path of the firm because they represent the locus of
all efficient input combinations. Figure 7.5 might be taken to represent one such
expansion path. 50 25 80 50 25 25 25 80 25 25 400 5 25 80 0 5 0 5 0 5 0 5 0 5 0 5 0
5 0 5 0

a decrease in the firms combined output level by 1 unit will result in a $975
increase in the firms maximum profit level. TOTAL REVENUE MAXIMIZATION
Although profit maximization is the most commonly assumed organizational
objective, it is by no means the

the underlying production function exhibits constant returns to scale. The output
level that corresponds to minimum long-run ATC is commonly referred to as the
minimum efficient scale (MES). Minimum efficient scale is the level of output that
corresponds

valuable insights into the operations of a profit-maximizing firm. Unfortunately,
that analysis suffers from a serious drawback. Implicit in that discussion was the
assumption that the profit-maximizing firm possesses unlimited resources. No
limits were p

Section D, Team 2
Problem Set 2 Managerial Economics
Alexis Basaldu
Alexander Binnie
Gadri Chandra
Shumpei Kobayashi
Dan Pariseau
Problem Set 2 Managerial Economics
Problem 1:
Arc Elasticity of Demand =
=
=
Q 2Q 1
Q (Q2+Q 1)/2
=
P
P 2P 1
(P2+ P 1)/2
1,053

Alexis Basaldu
Alexander Binnie
Gadri Chandra
Shumpei Kobayashi
Dan Pariseau
Problem Set 4 Managerial Economics
Question 1:
a. Average product at 4 tons of fertilizer = APF = # of Tulips Per Month / Tons of fertilizer
per month = 2200 / 4 = 550
b. MPF of

Profit Contribution Analysis
The break-even quantity is where total revenues and total costs
are equal
P Q=TFC + ( AVC Q )
P = Price
( P AVC ) Q=TFC
Q = Quantity
Q=
TFC
( P AVC )
TFC = Total fixed cost
Q=
TFC
( P c)
pc = profit contribution per
AVC = Av

total cost curve of the firm utilizing a higher level of fixed capital input than
SRATC2, and so on. We can see that the firm may produce a given level of output
with one or more short-run production functions: for example, the firm may
produce output lev

revenue product of labor (MRPL) is the change in the firms total revenue resulting
from a unit change in the amount of labor used. The marginal revenue product is
the marginal product of labor times the selling price of the product (i.e., MRPL = P
MPL).

increase in marginal cost is greater than the rate of increase in marginal revenue.
Note that in Figure 7.9 total revenue is maximized where MR = 0, which occurs at
an output level of Q5.As before, in the case of a monopolist facing a downwardsloping dema

Microeconomics. New York: John Wiley & Sons, 1999. Maxwell, W. D. Production
Theory and Cost Curves. Applied Economics, 1 (August 1969), pp. 211224.
McCloskey, D. N. The Applied Theory of Price. New York: Macmillan, 1982. Mills, D.
Capacity Expansion and

good 1 and 4 units of good 2, do cost complementarities exist? b. Do economies
of scope exist for this firm? c. How will the firms total cost of production be
affected if it decides to discontinue the production of good 2? Solution a. For costs
complement

To produce more efficiently, therefore, this firm should reallocate its budget
dollars away from labor and toward capital. Problem 7.3. Lotzaluk Tire, Inc., a
small producer of motorcycle tires, has the following production function: During
the last produ

Long-run production functions assume that all inputs are variable, which implies
that there are no fixed costs. Moreover, the law of diminishing returns is no longer
operable. The long-run cost concept of economies of scale follows directly from
the long-