Questions 11.8. Do the following functions exhibit increasing, constant, or decreasing returns to scale?

What happens to the marginal product of each individual factor as that factor is increased, and the other factor is held constant at some level? a. b. c. d. e. f.

Formatted: Bullets and Numbering

q ! 3L  2K
1

q ! (2L  2K) 2

q ! 3LK 2
1 1

q ! L2 K 2
1

q ! 4L 2  4K
7. The marginal product of labor in the production of computer chips is 50 chips per hour. The marginal rate of technical substitution of hours of labor for hours of machine-capital is 1/4. What is the marginal product of capital? 3. Fill in the gaps in the table below.
Quantity of Variable Input 0 1 2 3 4 5 6 1140 225 225 300 Total Output 0 225 300 Marginal Product of Variable Input ___ Average Product of Variable Input ___

g.

8. You manage a plant that mass produces engines by teams of workers using assembly machines. The technology is summarized by the production function.
h. q = 5 KL

where q is the number of engines per week, K is the number of assembly machines, and L is the number of labor teams. Each assembly machine rents for r = $10,000 per week and each team costs w = $5,000 per week. Engine costs are given by the cost of labor teams and machines, plus $2,000 per engine for raw materials. Your plant has a fixed installation of 5 assembly machines as part of its design. a. What is the cost function for your plant namely, how much would it cost to produce q engines? What are average and marginal costs for producing q engines? How do average costs vary with output?

b.

How many teams are required to produce 250 engines? What is the average cost per engine?

c. You are asked to make recommendations for the design of a new production facility. What capital/labor (K/L) ratio should the new plant accommodate if it wants to minimize the total cost of producing any level of output q?

9. The short-run cost function of a company is given by the equation TC=200+55q, where TC is the total cost and q is the total quantity of output, both measured in thousands. a.
b. c. d.

What is the companys fixed cost?

If the company produced 100,000 units of goods, what is its average variable cost? What is its marginal cost per unit produced? What is its average fixed cost?
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1.Joe quits his computer-programming job, where he was earning a salary of $50,000 per year to start . He opens his own computer software business store in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the following expenses: mortgage $18,000, salary paid to himself $40,000, rent, $0, and other expenses $25,000. Find the accounting cost and the economic cost associated with Joes computer software business.

2 11. Suppose that a competitive firm has a total cost function C(q) ! 450  15q  2q and a marginal cost function MC(q) ! 15  4q . If the market price is P=$115 per unit, find the level of output produced by the firm. Find the level of profit and the level of producer surplus.

8. A competitive firm has the following short run cost function:

C(q) ! q3  8q2  30q  5 .

a.Find MC, AC, and AVC and sketch them on a graph. b.At what range of prices will the firm supply zero output? At what price would the firm supply exactly 6 units of output? Identify the firms supply curve on your graph.
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7. Suppose the cost function is C(q)=4q2+16.

a. b. c. d. e. f. Find variable cost, fixed cost, average cost, average variable cost, and average fixed cost. Hint: Marginal cost is MC=8q. Show the average cost, marginal cost, and average variable cost curves on a graph. Find the output that minimizes average cost. At what range of prices will the firm produce a positive output? At what range of prices will the firm earn a positive profit? At what range of prices will the firm earn a negative profit?

5. Suppose that a competitive firms marginal cost of producing output q is given by MC(q) = 3 + 2q. Assume that the market price of the firms product is $9.
a. b. What level of output will the firm produce? What is the firms producer surplus?

4. Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost 2 of production is given by C = 200 +2 q , where q is the level of output and C is total cost. (The marginal cost of production is 4q. The fixed cost of production is $200.)
a. If the price of watches is $100, how many watches should you produce to maximize profit?

b. c.

What will the profit level be? At what minimum price will the firm produce a positive output?

1. The data in the following table give information about the price (in dollars) for which a firm can sell a unit of output and the total cost of production.
a. b. Fill in the blanks in the table. Show what happens to the firms output choice and profit if the price of the product falls from $60 to $50. Q P TR P= 60 TC T P = 60 MC MR P = 60 TR P = 50 MR P= 50 T P = 50

0 1 2 3 4 5 6 7 8 9 10 11

60 60 60 60 60 60 60 60 60 60 60 60

100 150 178 198 212 230 250 272 310 355 410 475

11. A monopolist faces the demand curve P = 11 - Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit. a. Draw the average and marginal revenue curves and the average and marginal cost curves. What are the monopolists profit-maximizing price and quantity? What is the resulting profit? Calculate the firms degree of monopoly power using the Lerner index.

7. Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of $40 per unit.
a. b. c. If the elasticity of demand for the product is 2, find the marginal cost of the last unit produced. What is the firms percentage markup of price over marginal cost? Suppose that the average cost of the last unit produced is $15 and the fixed cost is $2000. Find the firms profit.

6. Suppose that an industry is characterized as follows:

C ! 100  2Q2 MC ! 4Q P ! 90  2Q MR ! 90  4Q
a.

Firm total cost function Firm marginal cost function Industry demand curve Industry marginal revenue curve .

If there is only one firm in the industry, find the monopoly price, quantity, and level of profit. Find the price, quantity, and level of profit if the industry is competitive. Graphically illustrate the demand curve, marginal revenue curve, marginal cost curve, and average cost curve. Identify the difference between the profit level of the monopoly and the profit level of the competitive industry in two different ways. Verify that the two are numerically equivalent.

b. c.

5. The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of $10. Price 18 16 14 12 10 8 6 4 2 0 a. b. c. d. Calculate the firms marginal revenue curve. What are the firms profit-maximizing output and price? What is its profit? What would the equilibrium price and quantity be in a competitive industry? What would the social gain be if this monopolist were forced to produce and price at the competitive equilibrium? Who would gain and lose as a result? Quantity 0 4 8 12 16 20 24 28 32 36

3. A monopolist firm faces a demand with constant elasticity of -2.0. It has a constant marginal cost of $20 per unit and sets a price to maximize profit. If marginal cost should increase by 25 percent, would the price charged also rise by 25 percent?

5. A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets are: P1 = 15 - Q1 P2 = 25 - 2Q2 MR1 = 15 - 2Q1 MR2 = 25 - 4Q2.

The monopolists total cost is C = 5 + 3(Q1 + Q2 ). What are price, output, profits, marginal revenues, and deadweight loss (i) if the monopolist can price discriminate? (ii) if the law prohibits charging different prices in the two regions?

13. Suppose the market for tennis shoes has one dominant firm and five fringe firms. The market demand is Q=400-2P. The dominant firm has a constant marginal cost of 20. The fringe firms each have a marginal cost of MC=20+5q.
a. b. c. Verify that the total supply curve for the five fringe firms is Find the dominant firms demand curve. Find the profit-maximizing quantity produced and price charged by the dominant firm, and the quantity produced and price charged by each of the fringe firms. Suppose there are ten fringe firms instead of five. How does this change your results? Suppose there continue to be five fringe firms but they each manage to reduce their marginal cost to MC=20+2q. How does this change your results?

Qf ! P  20 .

d. e.

3. A monopolist can produce at a constant average (and marginal) cost of AC = MC = 5. It faces a market demand curve given by Q = 53 - P. a. b. Calculate the profit-maximizing price and quantity for this monopolist. Also calculate its profits. Suppose a second firm enters the market. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is now given by Q1 + Q2 = 53 - P. Assuming that this second firm has the same costs as the first, write the profits of each firm as functions of Q1 and Q2. c. Suppose (as in the Cournot model) that each firm chooses its profit-maximizing level of output on the assumption that its competitors output is fixed. Find each firms reaction curve (i.e., the rule that gives its desired output in terms of its competitors output). Calculate the Cournot equilibrium (i.e., the values of Q1 and Q2 for which both firms are doing as well as they can given their competitors output). What are the resulting market price and profits of each firm?

d.

6. Suppose that two identical firms produce widgets and that they are the only firms in the market. Their costs are given by C1 = 60Q1 and C 2 = 60Q2, where Q1 is the output of Firm 1 and Q2 the output of Firm 2. Price is determined by the following demand curve: P = 300 - Q where Q = Q1 + Q2. a. b. c. Find the Cournot-Nash equilibrium. Calculate the profit of each firm at this equilibrium. Suppose the two firms form a cartel to maximize joint profits. widgets will be produced? Calculate each firms profit. How many

Suppose Firm 1 were the only firm in the industry. How would the market output and Firm 1s profit differ from that found in part (b) above?

d.

Returning to the duopoly of part (b), suppose Firm 1 abides by the agreement, but Firm 2 cheats by increasing production. How many widgets will Firm 2 produce? What will be each firms profits?