Economics Homework 4 Assignment

The homework covers Ch 11~13. It has to be your individual work. For each question, please show the necessary derivation (if applicable) and highligh t the answer. Limit your answers within 5 pages. No cover sheet is required.

Q1: CH 11 (30%)

Consider a price-taking firm that has total fixed cost of $50 and faces a market determined price of $2 per unit for its output. The wage rate is $10 per unit of labor, the only variable input. Using the following table, answer the

questions below.

(1) Units of

Labor (2)

Output (3) Marginal

Product (4) Marginal

Revenue Product (5)

Marginal Cost (6)

Profit

1 5

2 15

3 30

4 50

5 65

6 77

7 86

8 94

9 98

10 96

a. Fill in the blanks in column 3 of the table by computing the marginal product of labor for each level of labor usage.

b. Fill in the blanks in column 4 of the table by computing the marginal revenue product for each level of labor usage.

c. How much labor should the manager hire in order to maximize profit? Why?

d. Fill in the blanks in column 5 of the table by computing marginal cost.

e. How many units of output should the manger produce in order to maximize profit? Why?

f. Fill in the blanks in column 6 with the profit earned at each level of labor usage.

g. Do your answers to parts c and e maximize profit? Does it matter whether the manager chooses labor usage or chooses output in order to maximize profit? Why?

h. How much labor should the manager hire when the wage rate is $20? How much profit is earned? Is marginal product greater or less than average product at this level of labor usage? Why does it matter?

Q2: CH 11 (15%)

Suppose you won a hoe remodeling company. You are currently earning short-run profits. The home remodeling

industry is an increasing-cost industry. In the long run, what do you expect will happen to

a. Your firm’s costs of production? Explain.

b. The price you can charge for your remodeling services? Why?

c. Profits in home remodeling? Why?

Q3: CH 12 (15%)

Higher unemployment caused by the recession and higher gasoline prices have contributed to a substantial reduction during 2008 in the number of vehicles on roads, bridges, and in tunnels. According to The Wall Street Journal (April 28, 2009), the reduction in demand for toll bridge and tunnel crossing created a serious revenue problem for many cities. In New York, the number of vehicles traveling across bridges and through tunnels fell from 23.6 million in January 2008 to 21.9 million in January 2009. “That drop presents a challenge, because road tolls subsidize MTA subways, which are more likely to be used as people get out of their cars.” In an apparent attempt to rise toll revenue, the MTA increased tolls by 10 percent on the nine crossings it controls.

a. Is MTA a monopolist in New York City? Do you think MTA possesses a high degree of market power? Why or why not?

b. If the marginal cost of letting another vehicle cross a bridge or travel through a tunnel is nearly zero, how should the MTA set tolls order to maximize profit? In order to maximize toll revenue? How are these two objectives related?

c. With the decrease in demand for bridge and tunnel crossings, what is the optimal way to adjust tolls: raise tolls,

lower tolls, or leave tolls unchanged? Explain carefully?

Q4: CH 12 (20%)

The Ali Baba Co. is the only supplier of a particular type of Oriental carpet. The estimated demant for its carpets is

Q = 112,000 – 500P + 5M

Where Q = number of carpets, P = price of carpets (dollars per unit), and M = consumers’ income per capita. The estimated average variable cost function for Ali Baba’s carpets is

AVC = 200 – 0.012Q + 0.000002Q2

Consumer’s income per capita is expected to be $20,000 and total fixed cost is $100,0000. a. How many carpets should the firm produce in order to maximize profit?

b. What is the profit maximizing price of carpets?

c. What is the maximum amount of profit that the firm can earn selling carpets?

d. Answer parts a through c if consumers’ income per capita is expected to be $30,000 instead.

Q5: CH 12 (20%)

A firm with two factories, one in Michigan and one in Texas, has decided that it should produce total of 500 units

to maximize profit. The firm is currently producing 200 units in the Michigan factory and 300 units in the Texas

factory. At this allocation between plants, the last unit of output produced in Michigan added $5 to total cost, while the last unit of output produced in Texas added $3 to total cost.

a. Is the firm maximizing profit? If so, why? If not, what should it do?

b. If the firm produces 201 units in Michigan and 299 in Texas, what will be the increase (decrease) in the firm’s

total cost