Revision hand out Topics 6 to 9 Topic 6 Cost of production 1. Adam's Printing Service rents a small ofce in the university premises for $150 a week that serves as his factory. He hires workers for $275 a week. a) Fill in the Table Number of Output Marginal Rent of the Labour costs Total costs workers (Boxes of product of factory printing per labour week) 0 0 1 330 275 425 2 630 3 1 50 825 975 4 890 5 950 60 1375 6 10 1 800 b) What is the marginal product of the fourth worker? c) What is the total cost associated with making 890 boxes of premium chocolates per week? d) During the university holidays Adam does not get any printing orders. What are his costs per week during that time? C) One week, Adam exactly breaks even. If his revenue for the week is $1525, how many boxes of printing did he produce? 1) Adam has received an order for 3000 boxes of printing for next week at the current prices. If he expects that the trend in the marginal product of labour will continue in the same direction, what is your advice to Adam? Explain your answer. 2. Explain the shape of the typical production function and the reasons for it. 3. Explain the relationship between the marginal cost curve and the marginal product curve. 4. Nina is a farmer who grows and sells tomatoes. Her total explicit and implicit costs are $9,000 per month, and her explicit xed costs are $3,000 per month, and all her variable costs are explicit. Nina could otherwise earn $4,500 in her next best alternative line of employment. Each kilogram of tomatoes sells for $3.00. This month, Nina sold 2,500 kg of tomatoes. a) What is Nina's average xed cost, average variable cost, and average total cost of production? c) Explain the difference between an implicit cost and an explicit cost and explain how both costs relate to economic and accounting prots. 2|Page Topic 7 Perfect competition 1. Refer to the previous question where Nina is a tomatoe farmer. Assume that tomatoes are sold in a competitive market. a) Draw an approximate graph to illustrate Nina's current situation. Your graph should have all labels, including dollar values where relevant. b) You would have observed that Nina is earning negative economic prot. What is your advice to her? 3|Page Topic 8 Monopoly Graph Cost and Revenue($) C $16 D $12 $8 55 A i E A I I 20 30 75 80 00 Quantity The above graph relates to a monopolist selling a unique clothing item in regional Australia. Assume that the monopolist is operating at the prot maximising output level. a) Find the following infonnation for the monopolist. i. Current output and price ii. Total revenue iii. Total cost iv. Total prot b) If the rm was operating at social optimum what would be the price and quantity? c) Does the monopoly depicted in the graph create deadweight loss (DWL)? Explain why or why not. 4|Page Topic 9 Monopolistic competition and oligopoly 1. Cathy's Organic Milk differentiates itself based on clean eating. Then two other suppliers of organic Milk enter the market, and a different store brand also joins the organic milk market. a) Cathy is operating in which market structure? Explain b) How would Cathy's demand curve, marginal revenue curves, and output be affected when other rms entered the market? 2. The following table shows revenue and cost information of a hair salon operating in monopolistic competitive market structure. Marginal Marginal Average Cost Revenue MR Cost MC AC 5 20 10 19 28 17 15 17 14 20 15.5 13 25 14 14 5|Page a) Draw an approximate graph to illustrate this hair salon operating at the profit maximising output level. Your diagram should label the area of profit, and include relevant dollar values and calculations from the table 3. Compare the social efficiency of oligopolistic market outcomes to perfectly competitive market outcomes and monopoly outcomes. ...... ...... 4. Why do cartels fail despite the fact that firms in a cartel are able to achieve higher profits? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6 | Page