## Production and cost analysis

MC Chapter 8 and 9

1)  A short-run production function assumes that

the level of output is fixed.
at least one input is a fixed input.
all inputs are fixed inputs.
both a and b
both b and c

2)  Refer to the following table:

Amount of total output produced from various combinations of labor and capital.

 Units of Capital

 1 2 3 Units of Labor 12 3 4 5 6 80180 270 340 390 410 100220 330 420 490 530 120260 390 500 590 650

If capital is fixed at two units, what is the marginal product of the fourth unit of labor?

 60 80 100 420 none of the above

3) Refer to the following table:

Amount of total output produced from various combinations of labor and capital.

 Units of Capital

 1 2 3 Units of Labor 12 3 4 5 6 80180 270 340 390 410 100220 330 420 490 530 120260 390 500 590 650

If labor is fixed at three units, how much does the third unit of capital add to total output?

 60 80 110 130 none of the above

4)  If average product is increasing, then marginal product

 must be greater than average product. must be less than average product. must be increasing. cannot be decreasing. both a and c

5  Suppose that you run a house-painting company and currently have 2 workers painting a total of 4 houses per month.  If you hire a third worker, 6 houses can be painted per month.

If you hire a fourth worker, 9 houses can be painted, and a fifth and sixth worker will increase the number of houses painted to 13 and 15, respectively.  Diminishing returns

 set in when the fourth worker is hired. set in when the fifth worker is hired. set in when the sixth worker is hired. have not yet set in because output is still increasing.

6  The marginal product of labor

 measures how output changes as the wage rate changes. is less than the average product of labor when the average product of labor is decreasing. is negative when adding another unit of labor decreases output. both a and b both b and c

7  Refer to the following table:

 Output Total Cost Total Fixed Cost Total Variable Cost Average Fixed Cost Average Variable Cost Average TotalCost Marginal Cost 100200 300 400 560_____ _____ _____ __________ _____ _____ 60_____ _____ _____ __________ _____ _____ __________ 4.00 _____ __________ _____ 7.00 _____4.00 _____ _____

What is the total fixed cost when 400 units of output are produced?

 \$500 \$2000 \$3500 \$5000 none of the above

8 Refer to the following table:

 Output Total Cost Total Fixed Cost Total Variable Cost Average Fixed Cost Average Variable Cost Average TotalCost Marginal Cost 100200 300 400 560_____ _____ _____ __________ _____ _____ 60_____ _____ _____ __________ _____ _____ __________ 4.00 _____ __________ _____ 7.00 _____4.00 _____ _____

What is average total cost when 200 units of output are produced?

 \$2.30 \$2.50 \$4.00 \$4.80 none of the above

9  Refer to the following table:

 Output Total Cost Total Fixed Cost Total Variable Cost Average Fixed Cost Average Variable Cost Average TotalCost Marginal Cost 100200 300 400 560_____ _____ _____ __________ _____ _____ 60_____ _____ _____ __________ _____ _____ __________ 4.00 _____ __________ _____ 7.00 _____4.00 _____ _____

What is average fixed cost when 300 units of output are produced?

 \$0.60 \$3.00 \$160 \$500 none of the above

10 Refer to the following table:

 Output Total Cost Total Fixed Cost Total Variable Cost Average Fixed Cost Average Variable Cost Average TotalCost Marginal Cost 100200 300 400 560_____ _____ _____ __________ _____ _____ 60_____ _____ _____ __________ _____ _____ __________ 4.00 _____ __________ _____ 7.00 _____4.00 _____ _____

What is the marginal cost of the 250th unit of output?

 \$0.14 \$2.40 \$4.00 \$7.40 none of the above

11) Marginal cost

 measures how total cost changes when input prices change. measures how total cost changes when one more unit of output is produced. is less than average cost when average cost is decreasing. both a and b both b and c

12)  A firm is currently producing 10 units of output; marginal cost is \$24 and average total cost is \$6 at this level of output.

The average total cost at 9 units of output is:

 \$4 \$5 \$6 \$8 none of the above

13)  Suppose a firm is hiring 20 workers at a wage rate of \$60.  The average product of labor is 30, the last worker added 12 units of output, and total fixed cost is \$3,600.

What is marginal cost?

 \$.20 \$5 \$240 \$720 none of the above

14)  Suppose a firm is hiring 20 workers at a wage rate of \$60.  The average product of labor is 30, the last worker added 12 units of output, and total fixed cost is \$3,600.

What is average total cost?

 \$2 \$8 \$600 \$1800 none of the above

15)  Short-run average cost is

 always greater than or equal to long-run average cost. always less than long-run average cost. less than short-run marginal cost when short-run marginal cost is decreasing. both a and c

16)  When marginal cost is rising, average variable cost

 must be rising. must be falling. must be constant. could be rising or falling.

17)  A sofa manufacturer currently is using 50 workers and 30 machines to produce 5,000 sofas a day.  The wage rate is \$200 and the rental rate for a machine is \$1,000.  At these input levels, another worker adds 200 sofas, while another machine adds 500 sofas.  Assuming that the marginal product of labor is constant between 45 and 50 workers and the marginal product of capital is constant between 30 and 31 machines, if the firm uses 45 workers and 31 machines instead, then its

 cost will be unchanged, and its output will decrease by 500 units. cost will be unchanged, and its output will increase by 300 units. cost will be unchanged, and its output will increase by 500 units. output will be unchanged, and its cost will decrease by \$800. none of the above

18  A dry cleaner currently has 10 workers and 4 machines.  The workers’ wage rate is \$300 per worker and the rental rate for a machine is \$500.  The last worker added 600 units to total output and the last machine also added 600 units to total output.  Assuming that the marginal product of labor is constant between 10 and 11 workers and the marginal product of capital is constant between 3 and 4 machines, if the dry cleaner uses 11 workers and 3 machines instead, then

 cost will be unchanged and output will increase by 300 units. cost will be unchanged and output will decrease by 200 units. output will be unchanged and cost will decrease by \$500. output will be unchanged and cost will decrease by \$200. none of the above

19  A firm is using 500 units of labor and 100 units of capital to produce 100 units of output.  The price of labor is \$5 per unit and the price of capital is \$20 per unit.  At these input levels, another unit of labor adds 50 units of output, while another unit of capital adds 400 units of output.  The firm could increase output by

 10 units by spending \$1 more on capital and \$1 less on labor. 10 units by spending \$1 more on labor and \$1 less on capital. 350 units by spending \$1 more on capital and \$1 less on labor. 350 units by spending \$1 more on labor and \$1 less on capital. none of the above

20  You overhear a businessman say:  “We want to be big because there are economies associated with bigness.”  What he means is that

 total cost decreases as more is produced. long-run average cost decreases as more is produced. marginal cost decreases as more is produced. total fixed cost decreases as more is produced.

21 Diseconomies of scale

 exist when fixed cost increases as output increases. exist when long−run average cost increases as output increases. result eventually as the firm uses more and more labor with a fixed capital stock. both a and b all of the above

22)  If a firm is producing the level of output at which long−run average cost equals long−run marginal cost, then

 long−run marginal cost is at its minimum point. long−run average cost is at its minimum point. long−run total cost is at its minimum point. both a and b all of the above

23) If a firm is producing the level of output at which short−run average cost equals long−run average cost, then

 the firm has chosen the cost−minimizing combination of inputs to produce this level of output. with a fixed amount of capital, short−run average cost is greater than long−run average cost at any other level of output. the firm has chosen the profit-maximizing level of output. both a and b all of the above

24  Economies of scale exist when

total cost decreases as output increases.
long-run average cost decreases as output increases.
marginal cost decreases as output increases.
fixed cost decreases as output increases.

25 If there are no fixed costs in the long run, how can it be said that economies of scale arise from spreading fixed costs over more units of output?

 Economies of scale is a short run phenomenon, and so diminishing returns is the root cause of scale economies. It is the cost of quasi-fixed inputs that gets spread over more units of output and drives down average cost in the long run. Average fixed costs decline continuously as output rises. Long-run average cost falls because all fixed costs are sunk.

## Chapter 14

ECN 5050 Chapter 14

Problem 1

The local space museum has hired you to assist them in setting admission prices.  The museum’s managers recognize that there are two distinct demand curves for admission.  One demand curve applies to people ages 12 to 64, whereas the other is for children and senior citizens.  The two demand curves are:

PA = 9.6 – 0.08QA                                              PCS = 4 – 0.05QCS,

where PA is the adult price, PCS is the child/senior citizen price, QA is the adult quantity, and QCS is the child/senior citizen quantity.  Crowding is not a problem at the museum, so managers consider marginal cost to be zero.

a.  What price should they charge to each group to maximize profits?

b.  How many adults will visit the museum?  How many children and senior citizens?

c.  What are the museum’s profits?

Problem 2

Textbook publishers have traditionally produced both United States and international editions of most leading textbooks.  The United States version typically sells at a higher price than the international edition.  (a) Discuss why publishers use this pricing plan.  (b) Discuss how the Internet might affect the ability of companies to implement this type of policy.

Problem 3

Some tennis clubs charge an up-front fee to join and a per-hour charge for court time.  Others do not charge a membership fee but charge a higher per-hour fee for court time.  Consider clubs in two different locations.  One is located in a suburban area where the residents tend to be of similar age, income, and occupation.  The other is in the city with a more diverse population.  Which of the locations is more likely to charge a membership fee?  Explain.

Problem 4

You work for a company in India that manufactures and exports batteries and other charge storage devices. You are the sales manager for DC-DC converter that is used to step up or step down the voltage in various industrial applications. You currently price the product at 4,000 Indian Rupees (NR) and sell 100,000 units. You estimate that if you price the product at 3,000 INR you would sell 150,000 units. You think it is reasonable to assume that your demand curve is linear.

1. Derive the equation for your demand curve from the two price and sales points discussed above.
2. Are you currently operating in the elastic or inelastic portion of your demand curve?

Problem 5

You own a theater with 200 seats.  The demand for seats is Q = 300 – 100P.  You are charging \$1.25 per ticket and selling tickets to 175 people.  Your costs are fixed and do not depend on the number of people attending.  Should you cut your price to fill the theater?  Explain.  What other pricing policies might you use to increase your profits?

Problem 6

Great Nuggets finds that there is a clear gender difference in the demand for their chocolates. Men have very little price sensitivity and tend to buy whatever the sales clerk recommends. Women, on the other hand, tend to ask many questions about product quality and attempt to maximize the quantity available for the price. Great Nuggets would like to implement a two-tier pricing system based on gender. What (non-legal) problems would it encounter?

Problem 7

Cellwave is a cellular phone company.  Answer the following questions relating to its pricing policies:

When Cellwave started out it sold to a group of homogenous retail customers.  Each person’s monthly demand for cell phone minutes was given by P = \$2 – .02Q, where P = the price per minute and Q = the quantity of minutes purchased each month.  Cellwave’s marginal cost is 10 cents per minute.  Suppose that Cellwave charges a single per minute price to all customers (independent of the number of minutes they use each month).  What is the profit-maximizing price?  Depict this choice on a graph.  On a per customer basis, what are the company’s profit, consumer surplus, and the deadweight loss?

1. Suppose that Cellwave chooses to charge a two-part tariff (with a monthly fixed charge and a per-minute rate) rather than a single per minute price.  What two-part tariff extracts the entire consumer surplus?  What are the company’s profits (on a per customer basis)?  How many minutes does each customer use per month?  What is the deadweight loss?

Problem 8

Two consumers 1 and 2 of the same product have the following demand curves
Q1 = 500 – 10 P and Q2 = 500 – 20 P. MC for the firm is \$10. Calculate the prices when the firm discriminates between the two consumers. Is this a good strategy, or should the firm charge the same price to both of them?

Multiple Choice

1)    A firm with market power in pricing faces:

a)    a flat demand curve.

b)    a vertical demand curve in all cases.

c)    a price inelastic demand curve.

d)    a downward sloping demand curve.

2)    If Tiger Toys faces a demand curve of P = 85 – .25Q and a MC = ATC = 20, then the market price would be:

a)    \$85.00                           b)            \$52.50                   c)            \$130.00                 d)            \$32.50

3)    If Tiger Toys faces a demand curve of P = 85 – .25Q and a MC = ATC = 20, then the markup would be:

a)    \$52.50.                          b)            \$20.00.                  c)            \$32.50.                  d)            \$65.00.

4)    For decision making for the firm with market power, fixed costs are:

a)    a key element in the markup.

b)    irrelevant.

c)    the same as marginal costs.

d)    opportunity costs of production.

5)    As a firm’s market power in pricing decreases, the price elasticity of its demand:

a)    stays the same.                                                                                                        c)            is equal to one.

b)    decreases.                                                                                                                  d)            increases.

6)    The cost plus pricing formula tends to ignore:

a)    incremental costs.                                                                                   c)            fixed costs.

b)    customer price sensitivity.                                                   d)            both a and b.

7)    Many college basketball programs require alumni to join a booster club before they can buy season tickets. This is an example of:

a)    a two-part tariff.

b)    first degree price discrimination.

c)    block pricing.

d)    cost-plus pricing.

8)    Price discrimination requires that different customers have different levels of price sensitivity and that:

a)    the cost of production is different for every customers.

b)    customers cannot resell the product amongst themselves.

c)    demand is homogeneous amongst customers.

d)    marginal costs are falling.

9)    If a firm prices its output at marginal cost – the competitive solution – then the gains from trade are:

a)    all in producer surplus.

b)    split between producer and consumer surplus.

c)    all in consumer surplus.

d)    split in a Nash solution.

1. If a firm is selling a product in two markets, A and B, and the marginal revenue in A is \$25

and the marginal revenue in B is \$20, the firm should

1. charge a higher price in A where MR is higher
2. charge a lower price in B where MR is lower
3. sell more in B and less in A
4. sell more in A and less in B

1. Suppose all individuals are identical, and their monthly demand for Internet access from a

certain leading provider can be represented as P = 5 – 0.5Q where P is price in \$ per hour and Q is hours per month.  The firm faces a constant marginal cost of \$1. If the firm will charge a monthly access fee plus a per hour rate, the monthly access fee will equal

1. \$1.
2. \$5.
3. \$8.
4. \$16.

## Economic Thinking

Topics tutored include:

• Demand
• Production and Cost
• Market Structure
• Pricing and Market Power
• Economics of Strategy: Creating and Capturing Value; Games Theory
• Incentive conflicts and contracts
• Organizational Architecture
• Decision Rights: The level of Empowerment; Bundling Tasks into Jobs and Subunits
• Attracting and Retaining Qualified Employees
• Incentive Compensation
• Performance Evaluation: Individual and Division
• Choosing the legal form of organization
• Vertical Integration and Outsourcing
• Leadership: Motivating Change within Organizations