Question
Hi! Need some help with this old exam question. Thanks! 3.1 Compared to Sweden wages are low in Nepal relative to the cost of renting
Hi! Need some help with this old exam question. Thanks!
3.1 Compared to Sweden wages are low in Nepal relative to the cost of renting machines.
You're working on a road project in Nepal and let us assume that you have access to the same technology in Nepal as in Sweden. Should you use the same number of workers per machine in Nepal as you would in Sweden if you want to produce the road in a cost minimizing way? Explain why or why not using isocosts and isoquants.
3.2 Emelie and Kilian consider quitting their current jobs to start the company Wormhole to raise worms for fishing purposes. They would invest all their joint savings of 100,000 kronor on this which would have an alternative return of 10,000 kronor per year. If they didn't work with Wormhole they would each earn 500,000 kronor per year. They expect to have bills of 60,000 kronor per year to pay for costs such as water and heating of the production. What is the accounting cost of running Wormhole one year? What is the economic cost? Which one is the relevant in deciding whether to start Wormhole or not?
3.3 Trine owns the company Kjerag Oysters. She aims to export oysters to Germany where she acts as a price taker. After a couple of nights of calculations she believes that her cost function is given by C(q)=100+6q+2q2 , where q denotes kilos of oysters harvested.
Trine believes that the market price she will face in Germany is the equivalent to 50 kronor per kilo.
(a)Derive Trine's marginal cost function.
(b)Use your result from (a) to determine the profit-maximizing output level if the price is 50 kronor.
(c)Explain in words why the supply function for a price taker is the same as the marginal cost function.
(d)What will Trine's profit be at the price 50 kronor? Illustrate marginal costs and profit in a diagram.
(e)Now instead assume that Trine expects the price to be 22 kronor. Should Trine start production if she expects this price?
(f)Assume that the price is 22 kronor but that the fixed cost of producing (100 kronor) is sunk and was taken in the previous period.Should Trine produce in this case?
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