Question 1.1. (TCO A) Suppose you are hired to manage a small manufacturing facility that produces Widgets.
(a.) (15 points) You know from data collected on the Widget Market that market demand and market supply have both increased recently. As manager of the facility, what decisions should you make regarding production levels and pricing for your Widget facility?
Remember that supply and demand are about the market supply and market demand, which is bigger than your own company. You are being given data on supply and demand for the whole market and are being asked what effect that has on you as a small part of that market.
(b.) (15 points) Now, suppose that following the supply and demand changes in (a), a substitute good goes up in price, and your costs of production increase. What new decisions will you make regarding production levels and pricing for your Widget facility?(Points : 30)
Question 2.2. (TCO B) Suppose the governor of California has proposed increasing toll rates on California's toll roads, and has presented two possible scenarios to implement these increases. Following are projected data for the two scenarios for the California toll roads:
Scenario 1: Toll rate in 2012: $10.00. Toll rate in 2016: $22.50
For every 100 cars using the toll roads in 2012, only 81.6 cars will use the toll roads in 2016.
Toll rate in 2012: $10.00. Toll rate in 2016: $17.50
For every 100 cars using the toll roads in 2012, only 96.2 cars will use the toll roads in 2016.
Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2. (10 points)
Assume 10,000 cars use California toll roads every day in 2012. What would be the daily total revenue received for each scenario in 2012 and in 2016? (6 points)
Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic. Briefly explain. (4 points)
Question 3.3. (TCO C) You have been hired to manage a small manufacturing facility whose cost and production data are given in the table below.
Workers Labor Cost Output Revenue
1 $500 100 $700
2 1000 280 1150
3 1500 440 1440
4 2000 540 1570
5 2500 600 1670
6 3000 630 1710
7 3500 640 1730
(a.) (6 points) What is the marginal product of the second worker?
(b.) (6 points) What is the marginal revenue product of the fourth worker?
(c.) (6 points) What is the marginal cost of the first worker?
(d.) (12 points) Based on your knowledge of marginal analysis, how many workers should you hire? Explain you answer.
Question 4.4. (TCO C) John operates a small business out of his home and has very little in terms of fixed costs. Answer the next questions (Parts A and B) on the basis of the following cost data for John’s firm operating in pure competition:
OUTPUT ------ TFC ---------- TVC
0 $30.00 0.00
1 30.00 70.00
2 30.00 120.00
3 30.00 150.00
4 30.00 200.00
5 30.00 270.00
6 30.00 360.00
(a.) (15 points) Refer to the above data. If the product price is $60, at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations.
(b.) (15 points) Refer to the above data. If the product price is $55 at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations. (Points : 30)
Question 5.5. (TCO D) A software producer has fixed costs of $20,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below. Complete the table (TC, MC, TR, and MR), then answer Parts A and B.
Q TVC Price
2,000 $5,000 $25
4,000 7,000 22
6,000 18,000 20
8,000 33,000 10
10,000 50,000 1
(a.) (15 points) If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work.)
(b.) (15 points) What should be the production level if fixed costs rose to $70,000 per month? Explain.