Economics 201-02: Problems and Questions for the Second Term Test 1.

A profit maximizing firm whose production function is given by X = (K - 1) 1/3 (L + 4)1/6, employs in equilibrium 2 units of K and 60 units of L, with a total cost of $158 at the fixed prices current in a perfectly competitive market. Calculate the prices at which the inputs K and L were bought. [In case you have no calculus: MPK = [ (K - 1)-2/3 (L + 4)1/6 ] /3, and MPL = [ (L + 4)-5/6 (K - 1)1/3 ] /6. A profit maximizing firm with the following total-cost function TC = X 3 - 8X2 + 100X +512 operates under perfectly competitive conditions. Find the close-down point of this firm. [In case you have no calculus: MC = 3X2 - 16X + 100 ] Answer: 3. X(CDP) = 4

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The average-variable-cost function of a profit maximizing firm under perfectly competitive conditions is: AVC = 2X2 - 10X + 36. The firm's marginal costs are given by MC = 6X 2 - 20X + 36. Calculate the fixed costs (TFC) knowing that, if the price of X were Px = 260, the firm's economic profit would be =1300. [Hint: calculate the output level that maximizes profits at Px = 260; then recall that = TR - (TVC + TFC) ]. Answer: TFC = 108 John's Lawn Mowing Service is a small business that acts as a price taker (i.e., MR = P). The prevailing market price of lawn mowing is $20 per acre. John's total costs are given by TC = 0.1 X 2 + 10X + 50, where X = the number of acres John chooses to cut a day. His marginal costs are MC = 0.2 X + 10. a. How many acres should John choose to cut in order to maximize profit? b. Calculate John's maximum daily profit. c. Graph these results and label John's supply curve. Answer: (a) X = 50 (b) profit = 200

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Suppose that your firm uses labour and land in the production of a certain commodity. You are currently employing L = 10 workers and T = 20 acres of land (T stands for "terre": French for land). Your total expense on the labour you employ (L times P L) is $800 per day; your total rent payment for the land you use is $1200 per day. (a) Suppose that the marginal physical products of labour and land (MP L and MPT) are 16 and 14, respectively. Is your firm minimizing long-run costs? Explain why or why not. (b) Alternatively, assume that your firm is indeed minimizing long-run costs. What is the short-run marginal cost of output if you are certain that the marginal product of land is 10 ? (c) Answer question (b) above using a slightly different procedure. (a) Which equilibrium condition is satisfied at all points on a long-run average-total-cost curve? (b) Why? Your university sells student tickets to football games for $6 each, but you must wait in line for a half-hour to obtain a ticket. Scalping is legal. Non-student fans are willing to pay you $20 for your ticket. You have a part-time job where you can choose your own hours, which pays $8 per hour. [ Zero marks on the entire question unless each of the three answers is followed by a fully explanatory sentence ] a. b. c. What is your full economic cost of buying a ticket? What is your full economic cost of attending the game in person versus watching it on television? If you know you will have to work the day of the game, should you buy a ticket in order to resell it?

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Assuming that a perfectly competitive industry is initially in long-run equilibrium, use arrows, a number, or the equal symbol ("=": no change) to indicate the predictions of the model of perfect competition in the following instances (use the assumptions made in class if relevant): (a) Lump-sum tax in the long run

No. of firms:

Industry output:

Firms' output:

(b) Specific sales tax on producers per unit of output (long run) Industry output: Output price: Firms' output

(c) Leftward shift in market demand (increasing-costs industry) Industry output: 9. Output price: Economic profits:

In the context of which particular equilibrium analysis was it said in class that firms' competitive bidding for managers is expected to bring which particular curves to equal levels? Zero marks on the entire question if any of the two required answers is imprecise.