4.

Let's say that a firm's production function of a product is Q=5 , where Q is the production quantity produced, L is a labor amount, and K is a capital amount. The price of L is a wage, w, and w=2. The price of K is an interest rate, r, and r=5. Employing L is flexible at any time for this firm, but the investment in K is not that

flexible. So, the firm has invested an amount of K=16 in the current period of t,and the firm can restore its invested K only in the next period of t+1. With all the information provided, answer the following questions.

4-A. What is the short-term total cost function of this firm? (Hint: For two products of A & B, the total cost function can be calculated by TC =PAQA + PBQB)

4-B. What is the short-term average variable cost (AVC) function of this firm?

4-C. What is the short-term average fixed cost (AFC) function of this firm?

4-D. What is the short-term average total cost (ATC) function of this firm?

Q5. (5 points)

The market for ball-point pens are perfectly competitive, and thus the market price

is given as 1,000. Assume that a firm, who has an upward-sloping straight

marginal cost (MC) function, is currently producing 20,000 ball-point pens. Then,

with that amount of production, the firm's short-run marginal cost (MC) is 1,000won,

while its short-run average total cost (ATC) is 1,200won and its short-run average variable (AVC) cost is 900won. With all the information provided, answer the following questions.

5-A. Does this firm make a profit or a loss?

5-B. Calculate the profit or the loss this firm faces in 5-A.

5-C. Calculate the amount of a loss when the firm shuts down.

5-D. Does this firm have to shut down or continue to produce ball-point pens?

Explain why you think so briefly.

Q6. (6 points)

The supply of spring water is fixed as Q_wS=100, while the demand curve for spring water is Q_wD= 300 - P_w, where the price unit is KRW (won). Now the government imposes a tax of 20 won per Q_w on the consumers of spring water. With all the information provided, answer the following questions.

6-A. Calculate the amount of consumer surplus before the tax is imposed in the unit of won.

6-B. Calculate the amount of consumer surplus after the tax is imposed in won.

6-C. Calculate the amount of producer surplus before the tax is imposed in won.

6-D. Calculate the amount of producer surplus after the tax is imposed in won.

6-E. What is the tax revenue for the government? Calculate it in the unit of won.

6-F. What is the deadweight loss of the tax imposition? Calculate it in won.

Q7. (5 points)

Assume that two automobile companies, BMW (B) and Mercedes-Benz (M), are competing. Both of them can employ one of the two strategies, either to produce an old but steady-seller car model (Action Old) or to produce a new car model (Action New). If only one of the two produces a new model while the other produces an old model, the company with a new model earns a profit of 20 while the other with an old model earns a profit of 10 only. However, if both of them produce new models simultaneously, both of them earn a loss (minus profit) of 10. On the other hand, if both of them produce old models simultaneously, both of them earn a profit of 10. With all the information provided, answer the following questions.

7-A. Draw the payoff table for B and M.

7-B. What is the Nash equilibrium?

7-C. You are the CEO of BMW and now in the business conference to decide your company's strategy. Being of a careful character, you have not decided yet since you think you do not know which strategy of Mercedes-Benz will take. However, one of your smart directors argues that you should not wait any longer and that you must decide to take the strategy of Action New as soon as possible, whatever Mercedes-Benz takes. Do you agree with this person's argument? Explain why you think so briefly based on the result of 7-B.