Q1 Would any of the following affect Maria's best response curve or the firm's isocost lines for effort in Figure 6.6? If so, explain how.
a)The government decides to increase childcare subsidies for working parents but not for those unemployed. Assume Maria has a child and is eligible for the subsidy.
b)Demand for the firm's output rises as celebrities endorse the good.
c) Improved technology makes Maria's job easier.
Effort per hour, .9 Lower cost of effort Minimum (but infeasible) feasible cost 1 Worker's best response curve o_7_ ...................... 0.5 ..................... ..... I (_ MRS: MRT Higher cost of effort ' l I I I I : I 3 | C E I 5 n O 0 T 10 12 Reservation wage Hourly wage, w ($) Suppose that, with the status quo best response curve in Figure 6.7, the firm chooses the wage to minimise the cost of effort, and the worker's best response is an effort level of 0.6. 1 Best response curve (with higher unemployment) Status quo best 0.85 response curve Effort per hour, e 0.75 Best response curve (with higher unemployment benefit) 0.6 0 Reservation Status quo Reservation wage with reservation wage with 18 higher wage higher unemployment unemployment benefit Hourly wage, w ($) If unemployment rose: 1. Would effort be higher or lower than 0.6 if the firm did not change the wage? 2. How would the firm change the wage if it wanted to keep the effort level at 0.6? 3. How would the wage change if the firm minimised the cost of effort at the new unemployment level?Draw diagrams to show how the curves in Figure 7.5a would change in each of the following cases: 10 Price, P (dollars per pound) OH NWAUA V O D Isoprofit curve: $60,000 . Isoprofit curve: $34,000 . Isoprofit curve: $10,000 . Isoprofit curve: SO . Demand curve E Feasible set 20,000 40,000 60,000 80,000 Quantity of Cheerios, Q (pounds) Figure 7.5a The profit-maximizing choice of price and quantity for Apple-Cinnamon Cheerios. 1. A rival company producing a similar brand slashes its prices. 2. The cost of producing Apple-Cinnamon Cheerios rises to $3 per pound. 3. General Mills introduces a local advertising campaign costing $10,000 per week. To make sketching the curves easier, assume the demand curve is linear. In each case, can you say what would happen to the price and the profit?WQZ. EXERCISE 7.2 THE COST FUNCTION FOR APPLECINNAMON CHEERIOS Of course. cost funcons can have different shapes from the one drawn for Beautiful Cars. For AppleCinnamon Cheerios, we assumed the average cost was constant. so that the unit cost ofa pound of cereal was equal to $2. regardless ofthe quantity produced. 1. Draw the cost function (also called the total cost curve} for this case. 2. What do the marginal and average cost functions look like? 3. Now suppose that the marginal cost of producing a pound of Cheerios was $2. whatever the quantity, but there were also some fixed production costs. Draw the total, marginal, and average cost curves in this case. WQB. EXERCISE 7.4 LOOKING AT ISOPROFIT CURVES The isoprot curves for Cheerios are downwardsloping, but for Beautiful Cars they slope dommard when G is low and upward when 0 is high. 1. In both cases the higher isoprot curves get closer to the average cost curve as quantity increases. Why? 2. What is the reason for the difference in the shape of the isoprot curves between the two rms
