The production isoquants for Pyramid Music, a small, independent West Coast recording company, are shown on page 4 of this problem set. Pyramid's primary output is CDs of new artists' music.
Assume, in answering parts (a) through (f), that Pyramid has no fixed costs.
(a) In 1985 the wage rate for labor was $10/hour and machines rented for
$30/hour. What was the minimum cost of producing 1000, 2000, 3000, and 4000 CDs?
(b) By 1995, the wage rate had risen to $30/hour; machine rentals remained at $30/hour. What was the minimum cost of producing each of the four quantities from (a) in 1995?
(c) Explain in words why it is that, although the price of labor rose by a factor of 3, the total cost of producing 1000 CDs rose by a much lower factor.
(d) Draw Pyramid's expansion path in 1985 and 1995.
(e) Draw Pyramid's total, average, and marginal cost curves for 1985 and 1995. (Please put 1985 and 1995 on separate graphs. You will probably also want to put the total cost curves on a different graph from the average and marginal cost curves).
(f) Now, assume fixed costs were $3,000 in both years (1985 and 1995). Explain in words how the total, average and marginal cost curves would change.
Pyramid Music, Inc. Production Isoquants 450 K (machine hours/week) 400 350 Q=4000 300 250 200 Q=3000 150 - Q=2000 100 50 Q=1000 O O 100 200 300 400 500 L (labor hours/week)
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