Sample Short Answer/Problem Questions: Review Session #2 Question 1: Costs of Production
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| Sample Short Answer/Problem Questions: Review Session #2
Question 1: Costs of Production 1a) A fast-food restaurant currently pays $5 per hour for servers and $50 per hour for rental machinery. The restaurant uses seven hours of server time per unit of machinery time. Determine whether the restaurant is minimizing its cost of production when the ratio of the marginal product of capital to the marginal product of labor is 12. If not, what adjustments are called for to improve the efficiency in resource use? In equilibrium, r/w = MPK/MPL. I.e. if the firm is minimizing its costs of production, then the MRTS will equal a ratio of the prices of the inputs. The ratio of prices, r/w = 50/5 = 10, and the MRTS of capital for labor  . Since these two ratios are not equal, the firm should change the mix of inputs. To increase efficiency in the use of inputs, the firm should use more capital and use less labor to make the ratios equal.
1b) Complete the following table. Explain the pattern observed when looking at AC and MC.
MC is increasing from 1Q, implying diminishing marginal product of labor. AC start high (due to the presence of fixed costs). AC decline initially as FC get spread out over more output, but then start to increase with the increase in AVC. 1c) In the European Union, more than 400 firms produce shoes but only 1 produces aircraft. What might be one of the main explanations for the difference in the number of firms in the two industries? (Production) Economies of scale: the bigger is minimum efficient scale relative to market size, the fewer the number of firms that can survive. Question 2: Perfect Competition 2a) Conigan Box Company produces cardboard boxes that are sold in bundles containing a thousand boxes. The market is perfectly competitive, with boxes currently selling for $100 per thousand. Conigan’s total and marginal cost curves, where Q is measured in number of bundles per year, are: TC = 3,000,000 + 0.001Q2 MC = 0.002Q
Conigan should equate P to MC. Thus, 100 = 0.002Q so Q = 50,000. To determine profit:
To determine if the firm should operate or shutdown, we must compare P to AVC = 2b) Complete the following table for a price taking competitive firm, where the market price is $40. Determine the profit maximizing level of output.
Question 3: Analysis of Perfect Competition Use the diagram to answer the following questions:
p* = $50 and q* = 500
Tax = $20. Pb = $60, Ps = $40. 400 cameras will be sold. 
The DWL is because the quantity sold is less than the social optimum (there is a consumption distortion due to a higher Pb and a production distortion due to the lower Ps). The DWL = ½ * 20 * 100 = $1000 3b) The utilities commission in a city is currently examining pay telephone service in the city. The commission has been asked to evaluate a proposal by a city council member to place a $0.10 price ceiling on local pay phone service. The staff economist at the utilities commission estimates the demand and supply curves for pay telephone service as follows, where P = price of a pay telephone call, and Q = number of pay telephone calls per month: QD = 1600 - 2400P QS = 200 + 3200P
1600 – 2400P = 200 + 3200P. P = $0.25 and Q = 1000
The price ceiling is $0.10. QD = 1600-(0.1*2400) = 1360; QS = 200 + (0.1*3200) = 520. The shortage is 1360-520 = 840 calls per month. Question 4: Monopoly 4a) Draw two diagrams – the first to represent an individual firm in a perfectly competitive market in long-run equilibrium, and the second to represent a monopolist. Explain why monopoly leads to a deadweight loss. Perfect Competition: Slide 2, Chapter 10 Monopoly: Slide 7, Chapter 10 Monopoly leads to a deadweight loss because total output produced is less than the social optimum (under perfect competition).
DWL = ½ (10*8) = $40. 4c) Define a natural monopoly, explaining what the size of the market has to do with whether an industry is a natural monopoly. Suppose that a natural monopolist were required by law to charge its average cost. Draw a diagram, label the price charged, and the deadweight loss to society relative to marginal cost pricing. Natural monopoly: economies of scale are sufficiently large relative to market size that there is room for only one firm in the market that produces efficiently. In other words, AC are everywhere declining over the relevant range of output (so if we had many firms producing, then each firm would produce less, leading to AC increasing). Monopoly: Slide 15, Chapter 10. Note, the DWL is equal to the ½ * (Pac- Pmc) * quantity reduction. Directory: course course -> Algorithms for Register Allocation Andrew Pardoe course -> Ieor 4600 Mixed-Integer Rounding Inequalities course -> Exam 1 of Computer Networks (ice 1230) 2008 7 course -> San José State University Social Science/Psychology Psych 175, Management Psychology, Section 1, Spring 2014 course -> Kennan's Telegram (Excerpt) course -> Introduction course -> The university of british columbia course -> The philosophy of composition Download 46.46 Kb. Share with your friends:
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= TR – TC. TR = PQ = $100 * 50,000 = $5,000,000. TC = 3,000,000 + 0.001(50,000)2 = 3,000,000 + 2,500,000 = 5,500,000. Thus, 
. TVC = TC – TFC = 5,500,000 - 3,000,000 = 2,500,000. Thus, AVC = 
= $50. Since P = $100, the firm should operate in the short-run.