Understanding the discipline - American Economic Association

ECONOMICS
[DATE]

CHAPTER 5 HOMEWORK
Question 2
Sale price = $4 per unit
Capital = $25 per hour
Labour = $30 per hour
a) Fixed input and variable input
Labour would be fixed input and capital would be variable input.
b) Fixed cost
As labour is fixed input with wage rate of $30 per hours and the total hours is 20 and hence,
Total fixed cost = 30*20 =$600
c) Variable cost for manufacturing 475 units
From table, 475 units are manufactured is expected at two possible places 6 and 7 units of
capital.
1

VC with the help of 6 unit of capital = 25*6=$150
VC with the help of 7 unit of capital = 25*7=$175
d) Number of variable input units for profit maximization = 6 units,
e) Maximum profit
Profit = Total revenue – Total cost
= (PQ) – (FC+VC)
= (4*475) - {(20*30) + (6*25)} = $1150
f) Range of variable input units to increase marginal return exist
The marginal return exist does increase when the firm is operated is in first stage and the
marginal product of capital (variable input) remains increasing. Here, MPK increases up to 3
units of capital and thus, the capital is in range of 0 to 3 units.
g) Range of variable input units to decrease marginal return exist
The marginal return exist does decrease when the firm is operated is in second stage and the
marginal product of capital (variable input) remains decreasing. Here, MPK decreases to 3 to
11 units and thus, the capital range of 3 to 11 units.
h) Range of variable input units to do negative marginal return exist
The marginal return exist turns negative when the firm is operated is in third stage and the
marginal product of capital (variable input) turns negative. This will happen when, the capital
is in range of 8 to 11 units.
Question 4
Cost function
Number of units produced (output) = 10
2

a) Fixed cost (FC)
FC= 100
b) Variable cost
Q = 10
Variable cost (VC) = (20*10) + (15*10^2) +(10*10^3) =$11,700
c) Total cost
TC = FC+VC = 100 + 11700 = $11,800
d) Average fixed cost
AFC= FC/Q = 100/ 10 = $10
e) Average variable cost
AVC = VC/Q =11700/10 = $1,170
f) Average total cost
ATC = TC/Q = 11800 /10 = $1,180
g) Marginal cost
MC= d C ( Q )
d Q
MC= d
dQ ( 100+ 20Q+15 Q2 +10 Q3 )
MC=20+ 30Q+30 Q2=20+ ( 30∗10 )+ ( 30∗102 ) =$ 3,320
Question 6
Table
3

FC = Constant
VC = TC – FC
ATC = TC/Q
TC = FC+VC
AFC =FC /Q
AVC = VC / Q
ATC = AFC + AVC
MC = Change in TC / Change in Q
CHAPTER 7 HOMEWORK
Question 1
Four firm concentration ratio for the product X
Total sales = $2,000,000
Sales of first four firms = $260,000; $220,000; $150,000; $130,000
C4= 260000+220000+150000+130000
2000000
C4=0.38∨38 %
4

Four firm concentration ratio for the product X would be 38%.
Question 4
a) Price charged
Total revenue = $1,500,000
Lerner index L = 0.57
Marginal cost MC = $50
Price that would be charged by firm
P= 1
1−L MC = 1
1−0.57∗50=$ 116.28
b) Mark up factor
¿ 1
1−L = 1
1−0.57 =2.3256
It means that the price charged by firm would be 2.3256 times of the marginal cost of output.
c) It is apparent that the mark up factor comes out to be 2.3256 which means the firm is using
Price greater than marginal cost whereas there are more over than 800 firms. It represents that
the price competition is not dense and hence, the firm keeps the power to hold the market.
CHAPTER 8 HOMEWORK
Question 1
5