Could you help me to solve problem number 4, please. Thanks you a lot in any case!)
Problem set 3: Organizing Production, Production costs, Perfect Competition HOME ASSINGMENT # 3
Textbook chapters: MP: Ch.10, Ch.11, and Ch.12;
CFO: Ch.7, Ch.8, Ch.9 and Ch. 12
1. Suppose XYZ Corporation has a technology that uses only labor (L) and the
production function is the following: one unit of labor will produce one unit of output (x),
i.e., x=L. Also suppose that the firm can buy as much labor as it would ever want to at a
price of $10 per unit of labor.
a) Graph the: i) Total product of labor function; ii) Average product of labor function; iii)
Marginal product of labor function.
HINT: total product = x; average product = x/L; marginal product = (change in
x)/(change in L)
b) Graph the: i) Total cost function; ii) Average cost function; iii) Marginal cost function.
(Notice I have not differentiated between long-run and short-run, because with only one
input it doesn't make any sense to.)
2. The Manager for the ABC-Company is worried that the firm is not a cost-minimizer.
The company uses capital and labor in their production process. Both capital and labor
are purchased in competitive markets and are variable inputs. Given the current allocation
of labor and capital, the marginal product of labor is 49 and the marginal product of
capital is 45. The price of capital is 10 and the price of labor (wages) is 7. Analyze the
ABC-Company's situation. Is the firm cost-minimizing? If not, in what direction should
they move vis a vis capital and labor usage?
3. The following schedule represents the production function of a "Gift industry"
producing hand-carved National Souvenirs. Labor is the only variable input. Capital is
fixed at one unit.
of labor average
of labor marginal
of labor 0 0 ? ? 1 7 ? ? 2 14.5 ? ? 3 22 ? ? 4 29 ? ? 5 35 ? ? 1 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition 6 39 ? ? 7 39 ? ? 8 34 ? ? a) Draw the total product curve.
b) Determine the average and marginal products and plot the curves.
c) Where is the intersection point of AP and MP? (In terms of average product curve.)
d) At what output level does the law of diminishing marginal returns set in?
4. The table below lists cost data (in dollars) for Knife Plant near Kapchagai City, a firm
producing concrete blocks for construction (output (X) in thousands per day).
X FC SRVC SRTC AFC SRAVC SRATC SMC (In $)
0 ? 0 50 ? - ? - 1 ? ? ? ? 10 ? ? 2 ? ? 68 ? ? 34 ? 3 ? 28 ? ? ? ? ? 4 ? ? 92 ? ? ? 14 5 ? ? ? ? 12 ? ? 6 ? ? ? ? ? ? 24 7 ? ? 169 ? ? ? ? 8 ? 168 ? ? 21 ? ? a) Complete all the blanks in the table.
b) On graph paper, nearly plot AFC, AVC, ATC and MC(all in $) vs. output. Plot MC
points between the integers, i.e. at X = 0.5, 1.5, 2.5, etc.
5. A firm can build plants of three types, A, B, and C. The short-run average total cost
curve for each type of plant is given below:
10 TYPE B
8 TYPE C
(in $) 120 6 2 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition 40 8 80 7 140 5.50 60 6 100 6 160 5 80 5 120 5 180 4.50 100 6 140 6 200 5 120 7 160 7 220 6 a) Graph the firm's long-run average total cost curve.
b) If the firm concludes from marketing data that it will sell 120 units, which type plant
will it choose to select and build.
c) Subsequently the firm only sells 80 units. What are its costs now? How does the
manager feel about his plant decision?
6. Listed below are essential pieces of production information for Ibragim’s Apple Farm
near Almaty city. Find the following:
1. The average product of labor in the production of apples.
2. The marginal product of labor in the production of apples.
Ibragim’s Apple Farm Production Function
x Now use the cost information below, along with the product information above to get the
following short run costs:
3. fixed costs of apple production
4. variable costs of apples production
5. short run total costs of apple production
6. average fixed costs of apple production
7. average variable costs of apple production
8. short run average total costs of apple production
9. short run marginal costs of apple production
Labors' wage $8.00 Owner's wage $12.00 Rent $124.00 per
acre 3 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition Ibragim’s Apple Farm Cost Functions Apples
costs sr total
- 7. The table below lists cost data (in dollars) for Knife Plant near Kapchagai City, a firm
producing concrete blocks for construction (output (x) in thousands per day). ( Continue
of the problem #4)
X FC SRVC SRTC AFC SRAVC SRATC SMC units ( in $) 0 ? 0 50 ? - ? - 1 ? ? ? ? 10 ? ? 2 ? ? 68 ? ? 34 ? 3 ? 28 ? ? ? ? ? 4 ? ? 92 ? ? ? 14 5 ? ? ? ? 12 ? ? 6 ? ? ? ? ? ? 24 7 ? ? 169 ? ? ? ? 8 ? 168 ? ? 21 ? ? a) Complete all the blanks in the table.
b) On graph paper, nearly plot AFC, AVC, ATC and MC(all in $) vs. output. Plot MC
points between the integers, i.e. at X = 0.5, 1.5, 2.5, etc.
c) On your graph, indicate Knife Plant's short-run supply curve.
d) If the price set in a competitive market is $30 per thousand, how much should this firm
produce? How much profit will the firm receive?
e) At what price would the firm make zero profit?
f) If price is $16 per thousand, how much should the firm produce in the short-run? How
much profit will the firm receive? How much should they produce in the long-run? 4 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition 8. Answer the question or critically evaluate the statement and explain why or in what
way the statement is true, false, or uncertain.
a) Knowing the firm's cost functions is all the information one needs to know to
determine the profit maximizing level of output which the firm should produce.
b) Profit is always maximized at the quantity of output where marginal revenue equals
c) Since firms must always pay their fixed costs in the short-run, they should always
produce a positive amount of output in the short-run.
d) If a producer is minimizing the costs to produce a given level of output, then he/she is
maximizing profits by producing that level of output.
9. Fly-By-Night Airlines has regular flights to Iran. The airline is asked to add a
Nicaraguan flight to its route for which it will receive an additional $700,000 in revenue.
Cost information is as follows:
Fixed Costs = $1,000,000
Average Total Costs (with 1 flight to Iran) = $1,500,000
Average Total Costs (with 1 flight to Iran and 1 flight to Nicaragua) = $1,050,000
An unnamed source at Fly-By-Night claims the Nicaraguan route would be unprofitable
since the additional revenue would not cover costs. Do you agree or disagree. Explain.
10. As chief economist of BIN Publishing Co., (a firm in a perfectly competitive
industry) you have been asked to present the company's profit/loss situation at the Annual
General Meeting of stock holders. Show, using graphs, three alternative short-run
scenarios: (i) the firm making profits (ii) the firm making losses but continuing to
produce (iii) the firm making zero economic profit. Clearly label the areas denoting
profit/loss. When should the firm shut-down in the short-run?
11. Consider the following industries in the U.S. Would you characterize each as a
perfectly competitive industry? If not, explain why.
a) The market for IBM-compatible PCS, which are practically "identical" but come with
different servicing and warranty contracts.
b) The market for mainframe computers.
c) The pizza delivery market in Indiana.
d) The market for cable TV in Indiana.
e) The market for second-hand cars.
f) The labor market for college jobs in Indiana.
12. The data below pertain to the first year of operation of a Brown café at KIMEP
Total revenue - $350,000
Labor expenses - $125,000 5 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition Maintenance - $50,000
Electricity - $5,000
Capital invested - $100,000
Market interest rate 10%
a) What is the cafe's accounting profit?
b) The cafe's owner could have earned $60,000 as a professor in the hotel school if he
had not opened the cafe. The $100,000 of capital invested in the cafe came from his
savings. The capital invested was used to buy machinery that does not depreciate at all.
What is the cafe's economic profit?
c) Did the cafe owner make the right decision to open the cafe? Explain.
d) At what salary as a hotel school professor would the cafe owner have been indifferent
between opening the cafe and being a professor? Explain.
Suppose that the market demand curve and market supply curve for CDs (compact disks)
are as given in the following graph:
$ S 5
One typical firm in this industry, Acme CDs, has the following cost structure. Using all
this information, answer the following questions:
$ SRMC SRATC 6
2 50 90 100 x a. Given the current market price, what is Acme's marginal revenue?
b. Do we know the lowest price such that Acme will operate in the short run? If so, what
is this lowest price? If not, what additional information do we need? 6 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition c. Complete the remaining entries in the following table:
Output (x) Acme's
Cost Acme's Total
Revenue Acme's Total
100 d. What is Acme's profit maximizing level of output at the current market price? At this
quantity, what is the relationship between Acme's price and its marginal cost?
e. Suppose that Acme's fixed costs increase. What impact will this have on Acme's profit
maximizing level of output in the short run (relative to that found in part d.)? Why? What
impact will this increase in fixed costs have on Acme's profit in the short run?
f. Suppose that the price of CD players (a complementary good) decreases. How, if at all,
does this change influence Acme's profit maximizing quantity in the short run (relative to
that found in part d.)?
14. Answer the question or critically evaluate the statement and explain why or in what way the statement is true, false, or uncertain. Economists are silly to say that profits are
competed away in the long-run in perfectly competitive firms because no one would
bother to stay in the industry if it is not profitable for them to do so.
15. Assume: that the U.S. auto industry: 1) is perfectly competitive, 2) is presently in
long-run equilibrium, 3) is a constant-cost industry, that is to say, the cost of inputs
and/or the technology do not change when firms enter and exit the industry, 4) is such
that each plant has a set of "typically" shaped cost curves (in particular this means that
short-run supply is typically shaped), 5) is such that all car plants are the same, 6) is such
that demand is typically shaped.
a) Graph the present long-run equilibrium situation for both a typical plant and the entire
b) Let the demand for domestically built cars decrease because of attractive imports.
Explain and indicate on the graphs for the previous part, what happens in the short-run
and what must happen for the industry to be in long-run equilibrium once again.
c) Suppose now that the government becomes alarmed at the first sign of layoffs in the
industry and imposes a price support at the ORIGINAL price level. Using your graphs in
part (a), explain what will happen consequently, that is, explain what will happen in the
U.S. car industry in the short-run and in the long-run if the support is imposed.
d) How would your analysis be affected if the government decides to place import tariffs
on foreign made cars rather than use price supports to protect the domestic auto industry?
16. Assume that the gasoline industry is perfectly competitive, is a constant cost industry,
and is currently in long-run equilibrium, Graphically explain the short-run and long-run
effects on this market when a tax of $t per unit is imposed. Assume that the demanders
are responsible for paying the tax. In your analysis, indicate the changes in the buyer's 7 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition price, seller's price, profits, and number of firms, industry output and firm's output going
from the initial before-tax equilibrium to the short-run equilibrium to the final long-run
equilibrium. Show clearly on your graph the long-run supply curve for the industry. How
does the economic incidence of the tax change from the short-run to the long-run?
17. The Modulator's [MODS] are Cincinnati's Premier Party Band [with whom former
T.A. Annika S. regularly joins on stage singing backup] and are being run as a corporate
entity. Aside from playing great shows, the MOD's sell their albums [$5 profit per album],
MOD buttons [$2 profit per button] and MOD Tour travel packages [a travel package to
Captiva Island with the band and make $200 profit per MOD Tour sold]. All net profits
from albums, buttons, and MOD Tours go into the band's corporate account.
Unfortunately, the MODS do not have a sound system and must pay $650 to rent this
system per day [24 hours].
Each member of the band demands $40 per performance hour to play a show. Any money
left over after paying for the sound system and each of the eight band members is put into
the band's corporate account, i.e. if the band gets $1,800 for a 3-hour show: $650 goes to
rent the sound system, $40x8 [the # of members] x 3 [the # of performance hours] = $960
goes to the band members, and $190 goes into the corporate account.
The band has already been booked for a 3-hour wedding show paying $1900. To book the
sound system for the day of this show the MODS have paid the non-refundable sound
system fee of $650. Assume that as a result of playing the wedding, No MOD albums,
buttons, or MOD Tours will be sold.
Recently, the Mayor of Cincinnati called the MODS and asked them to play at the
Entertainment Stage at the "Taste of Cincinnati" for 3-hours. Unfortunately though, at the
same time as the wedding show is planned. The City of Cincinnati will provide the sound
system [at no cost] but the MODS must play for free. The Mayor argues that the MODS
should think of doing this show in terms of potential profit. He confidently asserts that by
playing such a popular and upscale event, the MODS will sell 14 MOD Tours, 160 MOD
albums, and 90 MOD buttons. [The Mayor asserts that the profits from selling MOD
items will easily pay the band members' and have money left over to put in the corporate
account.] Michael B. [the MOD's business strategist] realizes that the Mayor has a point,
but being the skeptic that he is, discounts the Mayors figures by 50% [i.e. MODS will sell
7 MOD Tours, 80 MOD albums, and 45 MOD buttons].
Suppose Michael B. wants to maximize net funds in the band's corporate account and you
have been hired to advise him. Please give a detailed analysis to the proceeding questions.
a) Assuming that the MODS can cancel the wedding show without penalty [but will not
be able to recover their non-refundable fee to book the sound system for the day] should
the MODS cancel their wedding show to play the Taste of Cincinnati?
b) Now, suppose a shrewd tavern owner located near the "Taste" offers the MODS $660
to play for 2-hours immediately after their "Taste" show [the MODS must bring a sound 8 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition system]. The only condition which the tavern owner insists upon is that the MODS must
announce at least 5 times during their "Taste" show that they will be appearing at his
tavern later that evening. The tavern owner realizes that by imposing this condition, he
will get valuable advertising which will draw people into his tavern. At first, Michael B.
is insulted that the tavern owner offered such a low fee since the minimum fee the MODS
would normally charge is $1290 [$640 for band members' fees, and $650 for the sound
system rental]. But then, Michael B. remembers sitting through some introductory micro
lectures, and realizes that there are special circumstances involved in making this specific
decision. He realizes that perhaps in this case, the MODS would be willing to accept less
than $1290 to play at the tavern. Why should the MODS consider accepting less than
$1290 to play at the tavern?
c) Should the MODS cancel their wedding show [once again assuming that there is no
penalty for canceling, but that their day rental fee for the sound system is non-refundable]
and play the Taste/Tavern shows?
One year ago, Max and Aliya set up a vinegar-bottling firm (called MAVB). Use
the following information to calculate MAVB’s opportunity cost of production
during its first year of operation:
• Max and Aliya put $50,000 of their own money into the firm.
• They bought equipment for $30,000.
• They hired one employee to help them for an annual wage of $20,000.
• Max gave up his previous job, at which he earned $30,000, and spent all his
time working for MAVB.
• Aliya kept her old job, which paid $30 an hour, but gave up 10 hours of leisure
each week (for 50 weeks) to work for MAVB.
• MAVB bought $10,000 of goods and services from other firms.
• The market value of the equipment at the end of the year was $28,000.
• Max and Aliya have a $100,000 home loan on which they pay an interest rate of
6 percent a year.
19. Aidan runs a shoeshine stand at the airport. With no skills and no job experience,
Aidan has no alternative employment. Other shoeshine stand operators that Aidan
knows earn $10,000 a year. Aidan pays the airport $2,000 a year for the space he
uses, and his total revenue from shining shoes is $15,000 a year. He spent $1,000
on a chair, polish, and brushes and paid for these items using his credit card. The
interest on his credit card balance is 20 percent a year. At the end of the year,
Aidan was offered $500 for his business and all its equipment. Calculate Aidan’s
opportunity cost of production and his economic profit.
20. Alternative ways of laundering 100 shirts are shown in table below
Method (hours) (machines)
18. 9 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition a. Which methods are technologically efficient?
b. Which method is economically efficient if the hourly wage rate and implicit rental
rate of capital are
(i) Wage rate $1, rental rate $100?
(ii) Wage rate $5, rental rate $50?
(iii) Wage rate $50, rental rate $5?
21. Sales of the firms in the tattoo industry are shown in
a. Calculate the four-firm concentration ratio.
Other 15 firms
b. What is the structure of the tattoo industry?
22. Vladimir is a computer programmer who earned $35,000 in 2012. But on January 1,
2013 Vladimir opened a body board manufacturing business. At the end of the first
year of operation, he submitted the following information to his accountant:
• He stopped renting out his cottage for $3,500 a year and used it as his factory.
The market value of the cottage increased from $70,000 to $71,000.
• He spent $50,000 on materials, phone, utilities, etc.
• He leased machines for $10,000 a year.
• He paid $15,000 in wages.
• He used $10,000 from his savings account, which earns 5 percent a year
• He borrowed $40,000 at 10 percent a year from the bank.
• He sold $160,000 worth of body boards.
• Normal profit is $25,000 a year.
a. Calculate Vladimir’s opportunity cost of production and economic profit.
b. Vladimir’s accountant recorded the depreciation on his cottage during 2007 as
$7,000. According to the accountant, what profit did Vladimir make?
23. In 2012, Balnur taught music and earned $20,000. She also earned $4,000 by
renting out her basement. On January 1, 2013, she quit teaching, stopped renting
out her basement, and began to use it as the office for her new Web site design
business. She took $2,000 from her savings account to buy a computer. During
2013, she paid $1,500 for the lease of a Web server and $1,750 for high-speed
Internet service. She received total revenue from Web site designing of $45,000
and earned interest at 5 percent a year on her savings account balance. Normal
profit is $55,000 a year. At the end of 2013, Balnur could have sold her computer
for $500. Calculate Balnur’s opportunity cost of production and economic profit in
24. Four methods of completing a tax return and the time taken by each method are:
with a PC, one hour; with a pocket calculator, 12 hours; with a pocket calculator
and paper and pencil, 12 hours; and with a pencil and paper, 16 hours. The PC and
its software cost $1,000, the pocket calculator costs $10, and the pencil and paper 10 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition cost $1.
a. Which, if any, of the methods is technologically efficient?
b. Which method is economically efficient if the wage rate is
(i) $5 an hour?
(ii) $50 an hour?
(iii) $500 an hour?
25. Azhat’s Bakery has a fire and Azhat loses
some of his cost data. The bits of paper that
he recovers after the fire provide the
information in the table (all the cost numbers
are dollars). Azhat asks you to come to his
rescue and provide the missing data in the
five spaces identified as A, B, C, D, and E.
26. The table shows the production function of
Medeu’s Balloon Rides.
Medeu’s pays $500 a day for
(rides per day)
each balloon it rents and $25
a day for each balloon
operator it hires.
a. Graph the ATC curve for
Plant 1 and Plant 2.
3 b. On your graph in a, plot
the ATC curve for Plant 3 and Plant 4.
c. Medeu’s LRAC curve, what is the average cost of producing 18 rides and 15 rides
d. Explain how Medeu’s uses its long-run average cost curve to decide how many
balloons to rent.
27. The market is perfectly competitive and there are 1,000 firms that produce paper.
As the quality of computer monitors improves, more people are reading documents
online rather than printing them out. The demand for paper permanently decreases
and the demand schedule becomes the schedule shown in the table. If each firm
11.18 Quantity demanded
(thousands of boxes per
500 Marginal cost
(dollars per box)
11.00 11 27
4 Business Microeconomics
Problem set 3: Organizing Production, Production costs, Perfect Competition a. 28. producing paper has the costs set out in second table.
What is the market price, market output, and economic profit or loss of each firm?
b. What is the long-run equilibrium price, market output, and economic profit or loss
of each firm?
c. Does this market experience external economics, external diseconomies, or
constant cost? Illustrate by drawing the long-run supply curve.
Batyr’s is one of many burger stands near Sport complex.
The figure shows Batyr’s cost curves.
a. If the market price of a burger is $4, what is Batyr’s
b. Calculate the economic profit that Batyr makes.
c. With no change in demand or technology, how will the
price change in the long run? 29. Leila’s Lasagna is a price taker that has the costs shown in
a. If lasagna sells for $7.50 a plate, what is Leila’s profitOutput
b. What is Lucy’s shutdown point?
c. Over what price range will Leila leave the lasagna
d. Over what price range will other firms with costs
identical to Leila’s enter the industry?
e. What is the price of lasagna in the long run?
30. Cell Phone Sales Hit 1 Billion Mark
More than 1.15 billion mobile phones were sold
worldwide in 2007, a 16 percent increase from the 990.9 million phones sold in
2006. … “Emerging marke...
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