1. Consider a firm with the following production schedule and a fixed cost in the short run of 19. This fixed cost comes from using the unique quantity of the fixed input that minimizes LRAC. Assume all of the firms are identical firms in the long run and all the firms can only produce whole quantities (i.e., Q=3.5 not possible)
q VC
1 16
2 29
3 40
4 49
5 59
6 71
7 86
8 106
a) Find the LR comp. eq. price, firm quantity, and market quantity if this LR equilibrium has 100 firms. (1 point)
Assume there is a new market demand for this good that contains the following points:
P QD P QD P QD
8 1316 13 1101 18 886
9 1273 14 1058 19 843
10 1230 15 1015 20 800
11 1187 16 972 21 757
12 1144 17 929 22 714
c) Find the new SRCE price, firm quantity, market quantity, and firm profit, and the new LRCE price, firm quantity, and number of firms. (1 point)
d) Draw a picture of the market and firm illustrating the SR and LR situation in (c). (1 point)
2. For the production schedule of a perfectly competitive firm given below, answer the following:
Units of Labor Total Output Units of Labor Total Output
1 7 4 19
2 12 5 21
3 16 6 22
a) If the price of output is $50 per unit, find the specific values for the Marginal Revenue Product and the quantity of labor the firm hires if the market wage is $75 (1 point)
b) If the price of the firm’s output changes to $30, explain how this changes the results in (a). Is it possible that this price change would lead to lower market wages? What would this tell you about the firms that make up the market demand for this type of labor? (1 point)
c) An increase in the price of capital causes this firm to hire less labor. Explain how this information allows you to determine whether the factor substitution effect or the output effect is larger. (1 point)
3. A firm has the choice of the following investments
Investment A: costs $5000 today, pays a total of $4000 next year and $1700 the second year. No value beyond that.
Investment B: costs $10000 today, pays $2000 next year and $9800 the second year. No value beyond that
a) Show which, if any, investments the firm will make if the interest rate is 10%. (1 point)
b) Show which, if any, investments the firm will make if the interest rate is 5%. (1 point)
c) Someone claims that the rate of return of project B is 9%. Explain whether or not you can refute this claim base only on the data from parts (a) and (b). Then set up (but do not solve) and equation that you give us an exact answer for the rate of return of the project. (2 points)
.
1. Consider a firm with the following production schedule and a fix.docx
1. 1. Consider a firm with the following production schedule and
a fixed cost in the short run of 19. This fixed cost comes from
using the unique quantity of the fixed input that minimizes
LRAC. Assume all of the firms are identical firms in the long
run and all the firms can only produce whole quantities (i.e.,
Q=3.5 not possible)
q VC
1 16
2 29
3 40
4 49
5 59
6 71
7 86
8 106
a) Find the LR comp. eq. price, firm quantity, and market
quantity if this LR equilibrium has 100 firms. (1 point)
2. Assume there is a new market demand for this good that
contains the following points:
P QD P QD P QD
8 1316 13 1101 18 886
9 1273 14 1058 19 843
10 1230 15 1015 20 800
11 1187 16 972 21 757
12 1144 17 929 22 714
c) Find the new SRCE price, firm quantity, market quantity,
and firm profit, and the new LRCE price, firm quantity, and
number of firms. (1 point)
d) Draw a picture of the market and firm illustrating the SR and
LR situation in (c). (1 point)
3. 2. For the production schedule of a perfectly competitive firm
given below, answer the following:
Units of Labor Total Output Units of Labor Total Output
1 7 4 19
2 12 5 21
3 16 6 22
a) If the price of output is $50 per unit, find the specific
values for the Marginal Revenue Product and the quantity of
labor the firm hires if the market wage is $75 (1 point)
b) If the price of the firm’s output changes to $30, explain how
this changes the results in (a). Is it possible that this price
change would lead to lower market wages? What would this tell
you about the firms that make up the market demand for this
type of labor? (1 point)
c) An increase in the price of capital causes this firm to hire
less labor. Explain how this information allows you to
determine whether the factor substitution effect or the output
effect is larger. (1 point)
3. A firm has the choice of the following investments
4. Investment A: costs $5000 today, pays a total of $4000 next
year and $1700 the second year. No value beyond that.
Investment B: costs $10000 today, pays $2000 next year and
$9800 the second year. No value beyond that
a) Show which, if any, investments the firm will make if the
interest rate is 10%. (1 point)
b) Show which, if any, investments the firm will make if the
interest rate is 5%. (1 point)
c) Someone claims that the rate of return of project B is 9%.
Explain whether or not you can refute this claim base only on
the data from parts (a) and (b). Then set up (but do not solve)
and equation that you give us an exact answer for the rate of
return of the project. (2 points)
