QUESTION 1

Question

QUESTION 1

a. Is it possible to have diminishing returns to a single factor of production and constant returns to scale at the same time? Discuss.

b. Isoquants can be convex, linear, or L-shaped. What does each of these shapes tell you about the nature of the production function? What does each of these shapes tell you about the MRTS?

QUESTION 2

a. A firm faces the following average revenue (demand) curve:

P = 120 − 0.02Q

where Q is weekly production and P is price, measured in cents per unit. The firm's cost function is given by C = 60Q + 25,000. Assume that the firm maximizes profits.

i. What is the level of production, price, and total profit per week?

ii. If the government decides to levy a tax of 14 cents per unit on this product, what will be the new level of production, price, and profit?

b. The United States currently imports all of its coffee. The annual demand for coffee by U.S. consumers is given by the demand curve Q = 250 - 10P, where Q is quantity (in millions of pounds) and P is the market price per pound of coffee. World producers can harvest and ship coffee to U.S. distributors at a constant marginal (= average) cost of $8 per pound. U.S. distributors can in turn distribute coffee for a constant $2 per pound. The U.S. coffee market is competitive. Congress is considering a tariff on coffee imports of $2 per pound.

i. If there is no tariff, how much do consumers pay for a pound of coffee? What is the quantity demanded?

ii. If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the quantity demanded?

iii. Calculate the lost consumer surplus.

iv. Calculate the tax revenue collected by the government.

v. Does the tariff result in a net gain or a net loss to society as a whole?

Answer 1

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