Question Professor Lynch Economics 101CE April 11, 2013

04 Jun Question Professor Lynch Economics 101CE April 11, 2013

Question
Professor Lynch

Economics 101CE

April 11, 2013

HOMEWORK #3

DUE DATE: WEDNESDAY, APRIL 17, 2013

This homework assignment is required and will be graded.

Only homework submitted at the start of class on the due date will be accepted.

You must show all formulas that you use and how you use them.

Work problems neatly and in a logical, organized manner.

In your graphical analysis, label all axes and graphs.

PROBLEM #1

A manufacturing firm faces the following production schedules in the short run, when capital is fixed

at 10 machines:

Marginal Product Average Product

Labor (Hours) Total Product (Output) Of Labor Of Labor

0 0

1 5

2 12

3 22

4 37

5 47

6 51

7 53

8 51

a. Complete the table above.

b. Determine the level of labor usage at which diminishing marginal returns set in.

c. Briefly explain what happens to marginal productivity when the eighth hour of labor is

employed.

PROBLEM #2

The following table represents cost information for a firm operating in a perfectly competitive

market. In the table, each of the terms is defined as follows: TFC is total fixed cost; TVC

represents total variable cost; TC is total cost; MC is marginal cost; AVC is average variable cost;

and ATC is average total cost. All costs are measured in dollars.

PROBLEM #2 CONTINUED

Output (q) TFC TVC TC MC AVC ATC

0 10.00 0.00

1 10.00 60.00

2 10.00 90.00

3 10.00 105.00

4 10.00 150.00

5 10.00 225.00

6 10.00 330.00

7 10.00 480.00

a. Does the table above represent short-run or long-run costs? Briefly explain your answer.

b. Find the quantity at which diminishing marginal returns set in.

c. Suppose that the market supply and demand are equilibrating at a price of $45.00. If the

firm’s goal is to maximize profits, will the firm choose to operate? If so, which quantity

will the firm choose to produce?

PROBLEM #3

The graph below represents a firm’s short-run cost curves. Suppose that the price in this market is

$10.00. If the firm’s goal is to maximize profits, will this firm operate or shut down in the short run?

If it chooses to operate, which quantity will it choose? If this firm’s cost curves are representative of

the typical firm in this industry, do you expect to observe entry or exit in this market over the long

run? When this process of entry or exit is complete, what will the final market price be for this

product? Briefly explain your answer.

PROBLEM #4

The graph below represents the short-run cost curves for a typical firm in a perfectly competitive

industry. Suppose the industry is currently at its long-run equilibrium, such that firms are making

economic profit of zero. Based on the graph, determine what the market price (and therefore

marginal revenue) currently is. To the right of the cost graph, sketch a supply and demand graph

representing the market conditions, assuming that there are 20 identical firms producing in this

industry. On this graph, clearly indicate the market price and total quantity that will be sold in the

market (hint: the total quantity sold in the market will be the quantity sold by a firm x 20, because

the market is made up of 20 identical firms).

PROBLEM #5

This problem is a continuation of Problem #4. Suppose this industry experiences an increase in

demand; following the shift in demand, the price in the market rises to $19. On your supply-anddemand

graph, illustrate this shift, and label the new demand curve “D2”. Determine the profitmaximizing

level of output for the typical firm. Shade the area of the cost graph that represents the

typical firm’s profits following this increase in demand. Are these profits positive or negative? If

producers expect the new demand conditions to last for a long time, will this industry eventually

experience entry or exit? Once this process of entry or exit is complete, what will the price of this

product be in long-run equilibrium (assume that the cost curves do not change during this time

period). Sketch a new supply curve, and label it “S2”, that reflects the supply curve once the process

of entry or exit is complete.

PROBLEM #6

A monopolist operates in an industry under the following demand and cost conditions.

P Qd TR MR TC MC

6.00 0 1.00

5.00 1 8.00

4.00 2 11.00

3.00 3 15.00

2.00 4 20.00

1.00 5 27.00

a. Complete the table above.