1. If a firm uses labor, capital, and raw materials to produce its product.The marginal productivity of labor is 4 and the marginal productivity of capital is 8. Then say the price of capital is $1,000 per week, i.e. to use a unit of capital (think machine if you like) for a week, the firm has to spend $1,000.The weekly wage is $650.If the firm wants to continue to produce what it is currently producing, would it want to continue to use the inputs it's currently using or not?Explain.
2. Say we have a firm that owns and operates a single factory.The owner employs 20 people tostart.Those 20 people produce 200 units per week.When another 20 people are employed, for a total of 40, production is 600 units.When another 20 are employed (60 total) production is 800 units.Finally, when a total of 80 people are employed, production is 900 units.The cost of energy, raw materials, and machinery (and all the other capital goods) is $20,000 per week when output is 200 units, $30,000""""is 600 units, $50,000""""is 800 units, $60,000""""is 900 units. The weekly wage (including all "fringe benefits") is $2000.What is average cost at each level of production?What kind of returns to scale does this data suggest?Hint: returns to scale aren't the same at every output.
3. Say we have 10 firms providing cellphone services in an area one year.The average cost ofproviding service to a customer is $700 a year. Average cost is constant.Now firms providing service in this area are charging $1,000 for a year of service.The going rate of return in the economy right now is 10%.What would you expect to happen in this particular market?Hint: with the info you've been given, you can calculate the current ROR in the market.
4. Using the numbers in 3, figure how low price could go.
5. Say the market demand schedule for a good is: D = 500 - 2p.The market supply schedule is: S = 50 + 3p. What if price is $150?Would the economist expect it to remain that high? What if price is $50?What is equilibrium price?
6. Say there are increasing returns to scale.When 1000 units per week are produced by a firm, average cost is $80.What would average cost be if 800 units are produced each week?
7. What does an isoquant consist of? Suppose the input combinations (20, 100) and (30, 90) are on one of a firm's isoquants (same one).The price of the first input is $100 and the price of the second is $500.What happens to the firm's output if it changes input use from (20, 100) to (30, 90)?What happens to production costs?