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Lecture

Mc conell chapter 11 problems.doc

6 Pages
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Department
Economics
Course Code
ECN 104
Professor
Tom Barbiero

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Factor Demand and Marginal Revenue Product in a Purely Competitive Firm The table shows production and input cost data for a firm buying and selling competitively. The firm uses one variable input and has fixed costs of $20. Complete the table and then use the information to answer the fill-in questions. Input Q MP Unit Price ofMRP $ TR TC Profit $ Units Input Q $ Price $ $ $ 1 17 ___ 20 2 ___ ___ ___ ___ 2 32 ___ 20 2 ___ ___ ___ ___ 3 45 ___ 20 2 ___ ___ ___ ___ 4 56 ___ 20 2 ___ ___ ___ ___ 5 65 ___ 20 2 ___ ___ ___ ___ 6 72 ___ 20 2 ___ ___ ___ ___ 7 77 ___ 20 2 ___ ___ ___ ___ a. The firm's marginal factor cost is $_____. b. For the first unit of input marginal revenue product is $_____ and is found by multiplying __________ and __________. c. The firm should hire the first unit of input since the __________ is greater than the __________. d. For the second unit of input the MFC is $_____ and the MRP is $_____. The firm should hire the second unit of resource since the __________ is greater than the __________. e. To maximize profits the firm should hire _____ units of input and obtain profits of $_____. f. Suppose the firm was using 4 units of input and was considering using one more unit. For the 5th unit of input the increase in the firm's revenue is $_____ and the increase in the firm's costs is $_____. The firm (should, should not) __________ hire the 5th unit of input. g. Another way to show whether the firm should hire the 5th unit of input is to compare the marginal revenue and marginal cost of an additional unit of output. Suppose the firm was using 4 units of input and decided to use 5 units. Total output would increase by _____ units and total cost would increase by $_____. Marginal cost of the extra output is defined as: (change in total cost/change in output) and equals $_____. Since this is a competitive firm, MR is the same as the __________ and equals $_____. Since MR of the output is (greater, less) __________ than its MC, the firm (should, should not) __________ undertake the extra production. Your answer: MP: 17, 15, 13, 11, 9, 7, 5; MRP: 34, 30, 26, 22, 18, 14, 10; TR: 34, 64, 90, 112, 130, 144, 154; TC: 40, 60, 80, 100, 120, 140, 160; Profit: -6, 4, 10, 12, 10, 4, -6; (a) 20; (b) 34, marginal product, output price; (c) MRP, MFC; (d) 20, 30; MRP, MFC; (e) 4, 12; (f) 18, 20; should not; (g) 9, 20; 2.22; price, 2.00; less, should not Factor Demand Schedule and Graph The table below refers to the same firm as in problem 1 (above). Unit Input Qd of Input Qd of Input Price (Output P = $2) (Output P = $3) 15 _______ _______ 20 _______ _______ 25 _______ _______ 30 _______ _______ 35 _______ _______ 40 _______ _______ a. In the first blank column, fill in this firm's short-run input demand schedule if their product sells in a purely competitive market for $2 (the same price as assumed in Problem 1). b. In the second blank column, fill in the input demand schedule if the price of their product rises to $3. c. Use the graph below to plot two input demand curves for this firm. Your answer: Qd at P = $2: 5, 4, 3, 2, 0, 0; (b) Qd at P = $3: 7, 6, 5, 4, 3, 2. (hire more workers as long as MRP < MFC) A Toy Manufacturer�s Factor Demand A manufacturer of toy wagons uses, among other factors, four wheels and one steel box to make a wagon. If there is an increase in the price of steel boxes, what will happen to the firm's demand for wheels? Is this a result of a substitution effect, an output effect, or both? Your answer: output effect leads to decreased demand for wheels; no substitution effect because input proportions are fixed: 4 wheels per 1 box. Substitution and Output Effe
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