Homework #3: Question 1. Problem and Application 4 on page 285. Please work on a, b, c, d, and e only. That is, ignore f. When you reconstruct the table in your work, please lower the space for Marginal Product and Marginal Cost by a half step. In other words, the first entries of Marginal Product and Marginal Cost should be aligned with the second entries of other columns. (50 points) Table of Costs: WorkerOutputMarginal Product Total CostAverage Total CostMarginal Cost 00–$200———– 12020 300$15. 00$5. 00 25030 400 8 3. 33 39040 500 5. 6 2. 50 412030 600 5 3. 33 514020 700 5 5 615010 800 5. 33 10 71555 900 5. 81 20 A. The table shows the marginal product; marginal product rises at first, but then starts to decline because of diminishing marginal product. B. The table shows the total costs for this scenario. C. Again, the table shows the average total cost. The average total cost will be shaped like a “U. ” The average total cost declines as quantity rises when the quantity is low. When the quantity is high, the average total cost rises. D. The table shows the marginal cost.
The marginal cost, like the average total cost, is also “U” shaped, but unlike the average total cost it rises steeply as the output increases. This is because of diminishing marginal product. E. When the marginal cost is falling, the marginal product is rising and vice versa. Question 2. (20 points) The licorice industry is competitive. Each firm produces 2 million strings of licorice per year. The strings have an average total cost of $0. 20 each, and they sell for $0. 30. a. What is the marginal cost of a string? Marginal cost = Change in total cost/change in quantity .30-. 20=. 0=Change in total cost .10/1=. 10 The marginal cost of one string is $0. 10. b. Is this industry in long-run equilibrium? Why or why not? No. In a long run quilibirum all firms are maximizing profits. No firms have incentive to enter or exit because all firms are earning zero economic profit. The firms in this competitive market are making a profit of $0. 10 on each string of licorice. At this rate there is no long-run equilibrium, but if more firms join this market to get in on some of the profit then there will be a long-run equilibrium; when too many firms join the market the demand goes down.
This can cause firms to make zero profit. Question 3. (30 points) Consider the following table. The price of the product is $8. Quatitity Total cost 0. $8 1. 9 2. 10 3. 11 4. 13 5. 19 6. 27 7. 37 a. Calculate profit for each quantity. How much should the firm produce to maximize profit? b. Calculate marginal revenue and marginal cost for each quantity. Graph them. At what quantity do these curves cross? How does this relate to your answer to part (a)? c. Can you tell whether this firm is in a competitive industry? If so, can you tell whether the industry is in a long-run equilibrium?