1. Bindery Express LLC. is an online business. It mostly takes book binding orders from its customers, shipping out the final products. It also accepts print orders used for advertisement. The first two columns of the table below report the number of machineries and number of employees that are utilized on daily basis at BE LLC.

Number of Machineries	Number of Employees	Output	Fixed Cost	Variable Cost	Total Cost	Average Cost	Marginal Cost
K	L	Q	FC	VC	TC	ATC	MC
3	2		27.5				--
3	3		27.5
3	4		27.5
3	5		27.5
4	6		27.5
4	7		27.5
4	8		27.5
4	9		27.5

Note: All variables are recorded and computed on daily basis; e.g., K=3 and L=2 imply that 3 machineries and 2 employees are employed at BE LLC per day. It should also be noted that daily output (Q) is measured in number of "standardized" projects per day.

a. Consider the production function for BE LLC: Q = 5.75 X K^0.34 X L ^0.66 . Fill out the column under Output (Q), computing the changes in daily output that result from changes in number of machineries and employees.[1]

b. Considering the changes in number of machineries and employees (columns K and L), do you believe that the production function in part a is a short-run function or a long-run function? Describe the justification behind your choice in a short paragraph.

c. The daily cost of one unit of book binding and printing machinery (K) is $115. Also, the daily cost of one employee (L) is $85. Fill out the column under Variable Cost (VC), computing the changes in daily variable cost that result from changes in number of machineries and employees.

1. Using the fixed cost ($27.5 per day) and the computed daily variable cost (part c), fill out the column under Total Cost (TC).(5 points)
2. Using the computed daily output (part a) and total cost (part d), fill out the column under Average Cost (ATC).
3. Using the computed daily output (part a) and total cost (part d), fill out the column under Marginal Cost (MC).
4. In a short paragraph, describe how your computation of ATC differs from your computation of MC.

2. Consider the information in Question No. 1. Focus on the part where only 3 machineries are in use (i.e., K=3) and between 2 and 5 employees are employed (i.e., L=2, ..., L=5).

a. Compute the daily marginal product of the 3^rd employee (MPL₃), the 4^th employee (MPL₄), and the 5^th employee (MPL₅).

b. The average price of each order (P) is equal to $25.33. Compute the daily value of the marginal product of the 3^rd employee (VMPL₃), the 4^th employee (VMPL₄), and the 5^th employee (VMPL₅).

1. Consider the information in part c of Question No. 1, suggesting that the daily cost of one employee (L) is $85. Provide Yes or No answers to the questions below (5 points)

• Is it optimal for the manager to hire the 3^rd employee?
• Is it optimal for the manager to hire the 4^th employee?
• Is it optimal for the manager to hire the 5^th employee?
• In one short paragraph, explain the reasoning behind your Yes or No answers

3. Bindery Express LLC. is planning to expand the scope of its business activities by accepting graphic design orders. They are considering two options:

Option one: Once an order is placed, they will forward the order to a smaller online business, called: Grafix Virtual. They will collect 51% of the earnings from a given standardized graphic design order, and they will pay the remaining 49% to GV. We call this The Outsourcing Contract Option.

Option two: They purchase 74% of the standing shares at GV, internalizing their graphic design activities. This leads to a merger between BE LLC and GV. We call this The Vertical Integration Option.

Reflecting upon what you learned in Chapter 6, describe the pros and cons of each option. Under which conditions would you recommend the first option? How about the conditions under which you recommend the second option? Make sure that you describe those conditions clearly using bullet points. (20 points).

[1] For your information, the production function above results from estimating a log-linearized production function.