1. In the short-run, there are three “stages” of production. Identify or define each of these and then discuss why a Manager would never knowingly produce in either Stage I or Stage III.

2. Suppose you are the Manager of The Beach Bum, a small business in the competitive hotel industry. During the off season, the room price declines to only $100 per night, a price which is below your minimum average variable cost. In a well written memo to your boss and the owner of the hotel, Ms. Funicello, explain what you recommend she should do using economic theory.

3.

a. Explain carefully why profit is maximized ( or loss minimized ) for a perfectly

competitive firm at that output where P = MC.

b. The short-run supply curve for a perfectly competitive firm is that portion of the

firm’s marginal cost curve above minimum average variable cost. Why?

c. What is an increasing cost industry?

d. Explain carefully why the long-run supply curve of a increasing cost industry is

positively sloped.

4.

a. What are the assumptions or characteristics of perfect competition?

b. What is the difference between returns to scale and economies of scale?

c. Why is the law of diminishing returns important?

d. What is the major reason for diseconomies of scale?

e. How would an increase of capital affect a firm’s production function in the

short-run?

5. Suppose you are the Manager of O’Brien’s Oats, a small firm/farm in the perfectly competitive agricultural industry, with total cost given by TC = 450 + 15q + 2q ² and marginal cost given by MC = 15 + 4q. If the market price for your oats is $115,

a. calculate the level of output which maximizes profit or minimizes loss

b. for this output, calculate your firm’s total revenue

c. for this output, calculate your firm’s total cost

d. for this output, calculate your firm’s profit or loss

e. for this output, what is your firm’s total fixed cost?

f. for this output, what is your firm’s average fixed cost

g. for this output, what is your firm’s total variable cost

h. for this output, what is your firm’s average variable cost

i. for this output, what is your firm’s average total cost

j. for this output, what is your firm’s marginal cost

6.

a. Suppose you are the Manager of Kyer’s Kars, an auto assembly plant. Currently, you employ 1500 workers at a wage rate of $400. Your plant also currently uses 2000 machines with a rental rate of $100. Your currently produce or assemble fifty autos per day. Given this information, compute your total and average cost of production.

b. If your economic analysis indicates that production would increase to eighty autos assembled per day by increasing labor to 2250 and increasing capital to 3000, compute your total and average costs of production with these numbers.

c. Compute the output elasticity for your firm.

d. Compute the cost elasticity for your firm.

e. Does your firm experience economies or diseconomies of scale? How do you know?

7. Suppose you are the new Manager of Kramerica Corporation, a firm which makes large rubber bladders for oil tankers with two inputs capital and labor. On your first day, you discover that the marginal product of capital is 1000, the price of capital or rent is $100, the marginal product of labor is 500 and the price of labor or the wage rate is $20. Based on these numbers,

a. Is Kramerica employing its two inputs optimally? How do you know?

b. What would you do as Manager, and why? Be specific.

c. With the iso quant and iso cost tools, explain what you as Manager would do in

in response to a decrease of the wage rate.

8. With the table below, in which L is units of labor and Q is total output, answer the questions which follow.

L	Q
0	0
1	200
2	450
3	750
4	1000
5	1200
6	1300
7	1350
8	1350
9	1300
10	1200

a. What is the marginal product of the second unit of labor?

b. What is the average product of the seventh unit of labor?

c. Diminishing returns begin with the addition of which unit of labor?

d. What is the marginal product of the ninth unit of labor?

e. With which unit of labor does Stage III begin?

9. Suppose you are the Manager of Barry’s Bratwursts, a small business in the perfectly competitive meat packing industry. If the market demand and supply equations are given by Q ^D = 2900 – 125P and Q ^S = 1460 + 115P, respectively,

a. What is the market equilibrium price?

b. What is the market equilibrium quantity?

If your firm’s marginal cost is given as MC = 0.1q,

a. What is your firm’s profit maximizing/loss minimizing/optimal output?

b. With this q, what is your total revenue?

c. Draw your firm’s total revenue line or curve.

10. Answer the questions below with the following table:

Price quantity Total Cost

Price	Quantity	Total Cost
$81	0	190$
$81	1	270$
$81	2	340$
$81	3	400$
$81	4	470$
$81	5	550$
$81	6	640$
$81	7	750$

1. What is this firm’s total fixed cost of production?
2. What output should this firm produce to maximize profit or minimize loss?
3. If q = 7, what is this firm’s total revenue?
4. If q = 6, what is this firm’s marginal cost?
5. If q = 5, what is this firm’s average fixed cost?
6. If q = 4, what is this firm’s average variable cost?
7. If q = 3, what is this firm’s average total cost?
8. If q = 2, does this firm experience a profit or loss of how much?
9. If q = 1, what is this firm’s marginal revenue?
10. How do you know this firm is perfectly competitive?

11. Answer the questions which follow from the information given in the table.

Units of Labor	Total Product	Average Product	Marginal Product
0	0	0	0
1		80
2			96
3	276
4		88
5			48
6	420

a. If one unit of labor is hired, what is total product?

b. If two units of labor are hired, what is average product?

c. If three units of labor are hired, what is marginal product?

d. If four units of labor are hired, what is total product.

e. If five units of labor are hired, what is average product?

Answer rating: 100% (QA)

1 Stage one The first stage of production is the most growth stage This is where each additional variable input will produce more products This is depicts an increasing marginal return where the inves... View the full answer