- Fill in the following table assuming computers are a fixed input that costs $30 per unit to rent and labor is a variable input that costs $12 per unit:
Computers | Labor | Q | APL | MPL | FC | VC | Cost | MC | AFC | AVC | AC |
10 | 0 | 0 | |||||||||
10 | 1 | 200 | |||||||||
10 | 2 | 300 | |||||||||
10 | 3 | 200 | |||||||||
10 | 4 | 650 | |||||||||
10 | 5 | 136 | |||||||||
10 | 6 | 20 |
- Graph the APL and MPL curves with Units of Labor on the horizontal axis and Units of Output per Worker on the vertical axis.
- Graph the AVC and MC curves with Output (Q) on the horizontal axis and Dollars per Unit on the vertical axis.
- What is relationship between APL and AVC? What is relationship between MPL and MC?
- Sketch on one diagram the short run AVC, ATC, and MC curves for a firm with a fixed capital stock and a typical production function as shown in the bottom panel of Figure 8-2 on page 205).
- Suppose the town in which this firm is located passed a law requiring every business, no matter what its size, to purchase a $500 business permit. Which of the curves would be affected by the new law?
- Repeat part (a) assuming the wage rate for labor rose instead of a new law.
- Repeat again assuming instead that a tax on all capital equipment equal to 5% of its value is enacted.
- In 1998 the price of energy increased dramatically. Before the price surge, Kaiser Aluminum (in Spokane) had purchased the rights to buy electricity at a fixed rate. After the price surge, Kaiser still owned these rights so they were able to buy their electricity at a much lower price than the rest of the city. (Note: these rights can be bought and sold at any time)
- What happened to Kaiser’s cost of producing aluminum when the price of electricity went up? (Remember, they didn’t have to pay the higher price for electricity.)
- Imagine there was another aluminum plant, Alcoa, that didn’t have the rights to buy electricity at a low price. After the price of electricity went up how did production costs for Alcoa compare to production costs for Kaiser?
- As it turns out, when the price of electricity was very high Kaiser stopped producing aluminum. Does this surprise you? Why or why not?
- A firm has two plants, each with different costs of production.
Plant 1: Cost = 100 + 9Q + Q2 (MC=9+2Q)
Plant 2: Cost = Q + 5Q2 (MC=1+10Q)
The firm wants to produce 200 units of the good at the lowest cost. How much should it produce at each plant?
- Consider a competitive industry consisting of 100 identical firms each with the following cost schedule:
Output | Total Cost |
0 | 300 |
1 | 400 |
2 | 450 |
3 | 510 |
4 | 590 |
5 | 700 |
6 | 840 |
7 | 1020 |
8 | 1250 |
9 | 1540 |
10 | 1900 |
Market demand is given by the following schedule:
Price: | $360 | 290 | 230 | 180 | 140 | 110 | 80
|
Quantity Demanded: | 400 | 500 | 600 | 700 | 800 | 900 | 1000 |
- Draw the supply curve for an individual firm. On a separate graph, draw the demand and supply curves for the industry as a whole. Indicate the equilibrium price and output. Now draw the individual firm’s demand curve on your first graph and show the firm’s equilibrium, price and output.
- Explain why the equilibria found in part (a) are only short-run equilibria. What will happen to the industry in the long run? Describe the long-run equilibrium in detail.
- Suppose w=$6, r=$10, TC=$1200. Suppose the MRTS = 3K/4L.
- Graph the Isocost line.
- Find and graph the optimal choice of K and L.
- On the same graph, redo a) and b) for TC=$1500.
- Add the expansion path to your graph.
- With TC=$1200, compute the optimal choice of K and L if “r” rises to $15.