EC 201

Cal Poly Pomona

Dr. Bresnock

Final Exam Review Questions

1. A jeans manufacturer hires workers to sew jeans in its factory and derives the following daily yields of total product, or jeans output (in pairs):

Factory

Workers

(day)

/ TP
(pairs) /

MP

/ Total Value Product
/ Total Input Cost
/ Total

Profit

/ MVP /

MC

/ Marginal
Profit
0 / 0
1 / 5
2 / 15
3 / 20
4 / 23
5 / 24
6 / 23

a) Does this production function exhibit increasing, decreasing, constant returns, or some combination of the three?

b) Assuming the price of jeans is $30 per pair and each worker is paid $90 per day, if the jeans manufacturer acts to maximize profit, how many pairs of jeans will be produced? How many workers will be employed? What will the jean manufacturer's profit be at this output level? Why? (State the key condition used in your analysis and show all work in the table above.)

c) Now assume that each worker's wage drops to $30 per day. What is the new profit maximizing total output? How many workers are hired at this level? Why?

d) As a result of the input cost decrease specified in part (c), have profits risen or fallen? By how much have profits changed?

2. You are given the following information: TFC = $300, and Plabor = $20/hour.

a) Fill in the blanks in the following table.

Labor (hours)

/ TP = Q /

MP

/

TFC

/

TVC

/

TC

/

ATC

/

AVC

/

AFC

/

MC

0 / 0
1 / 50
2 / 110
3 / 150
4 / 185
5 / 215
6 / 235 / 300
7 / 240

b) Using the data from the table on the first page, graph the total cost, total variable cost, and the total fixed cost below.

c) Using the data from the table on the first page, graph the average total cost, average variable cost, average fixed cost, and marginal cost below.

d) The point of diminishing returns occurs when total product, or output, is , the amount or labor hours are , the marginal product is , and the marginal cost is .

e) This production function shows (increasing, diminishing, constant, combination of all three) returns.

3. a) Complete the cost table to make it consistent with the given numbers.

b) Plot the total cost functions for the range of output 0 - 10 on one diagram, and the average and marginal cost functions on another diagram.

Q / TC / TFC / TVC / ATC / AFC / AVC / MC
0 / 20
1 / 1
2 / 3
3 / 4
4 / 12
5 / 75
6 / 16
7 / 24.85
8 / 86
9 / 360
10 / 540

4. Luigi's Pizza Kitchen is a price taker. It has the following hourly costs:

Output Total Cost

(pizzas per hour) (dollars per hour)

0 $10

1 21

2 30

3 41

4 54

5 69

6 86

a) If pizzas sell for $15, what is Luigi's profit-maximizing output per hour? What is his profit? Your answer must include graphical as well as numerical solutions. You must show the total and marginal graphical solutions.

b) If pizzas sold for $11 instead of $15, how many pizzas would Luigi offer for sale? Explain thoroughly with graphical as well as numerical solutions.

c) What is Luigi's supply curve? Explain and show this graphically.

d) What price will cause Luigi to leave the pizza industry? What price will cause other firms with costs identical to Luigi's to enter the industry?

e) What is the long-run equilibrium price of pizza? Explain graphically and verbally.

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5. Using the following information, complete the table below.

Q / TC / MC / P / MR / AR / TR / Total Profit
0 / $10 / $10
1 / 6
2 / 4
3 / 5
4 / 7
5 / 10
6 / 14
7 / 19
8 / 25
9 / 32

a) Determine the price and output selection for this purely competitive firm. Is this a short-run or long-run equilibrium? Why?

b) Utilizing the TR and TC approach to graphically illustrate the equilibrium results for this firm.

c) Calculate the ATC and AVC for this firm. At what price level will the firm break-even? shut-down?

d) Utilizing the MR and MC approach graphically illustrate the results for equilibrium for this firm determined in part (a).

e) In your graph for part (d) show the price level at which the firm will break even. Then show the price level at which the firm will shut down.

6. Heidi's Mineral Springs, a pure monopoly, has the following demand schedule and total cost for bottled mineral water:

Quantity

(in bottles) Price Total Cost

0 $10 $ 1

1 8 3

2 6 7

3 4 13

4 2 21

5 0 31

a) Calculate Heidi's total revenue and marginal revenue schedules.

b) How many bottles of mineral water will Heidi sell? At what price? Will she earn an economic profit at this level of output? If so, what is her profit? Draw graphs using the total as well as marginal approaches to confirm your answer.

c) If the fixed costs increased by $5, how would this affect Heidi's output decision? Explain carefully. If the fixed costs increased by $10, how would this affect Heidi's output decision? Explain.

7. Using the following information, complete the table below.

Q / TC / MC / P / MR / AR / TR / Total Profit
0 / $10 / $10
1 / 6 / 9
2 / 4 / 8
3 / 5 / 7
4 / 7 / 6
5 / 10 / 5
6 / 14 / 4
7 / 19 / 3
8 / 25 / 2
9 / 32 / 1

a) Determine the price and output selection for this imperfectly competitive firm. Is this a short-run or long-run equilibrium? Why?

b) Utilizing the TR and TC approach to graphically illustrate the equilibrium results for this firm.

c) Calculate the ATC and AVC for this firm. At equilibrium does this firm earn a profit, loss, or break-even? If profit or loss what are the unit and total profits or losses?

d) In equilibrium had the firm covered its variable and fixed costs? Will this firm shut-down in the short-run? Why or Why not?

e) Utilize the MR and MC approach to graphically illustrate the equilibrium results for this firm determined in part (a).

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