Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 7.A, Problem 1TY
To determine
Budget line and the indifference curve of the firm.
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Suppose the wage rate for labor is $20 an hour and the rental rate for capital is $50 per hour. Based on this information, please answer the questions appearing below the graph. a. Draw the iso-cost line associated with an hourly budget of $1,000. b. What is the least-cost level of capital and labor this business should utilize when packaging 1,000 cases of fruit juice? How did you arrive at this answer? C. How much does it cost this business to package 1,000 cases of fruit juice? If the firm can sell the juice for $50 per case, what is its accounting profit?
A firm currently uses 40 units of labor (L) and 20 units of capital (K) to produce 400 units ofoutput. Input prices equal $30 for labor and $60 for capital, while the marginal products are 6 for labor and 3 forcapital. To minimize the cost of producing its current level of output, should the firm use more L and less K,more K and less L, or leave its input combination unchanged? Explain your answer.
4. Variouss measures of cost
Douglas Fur is a small manufacturer of fake-fur boots in San Diego. The following table shows the company's total cost of production at various
production quantities.
Fill in the remaining cells of the following table.
Quantity
Total Cost
Marginal Cost
(Dollars)
Fixed Cost
Variable Cost
Average Variable Cost
Average Total Cost
(Pairs)
(Dollars)
(Dollars)
(Dollars)
(Dollars per pair)
(Dollars per pair)
120
1
200
2
240
3
285
4
340
425
6
540
On the following graph, plot Douglas Fur's average total cost (ATC) curve using the green points (triangle symbol). Next, plot its average variable cost
(AVC) curve using the purple points (diamond symbol). Finally, plot its marginal cost (MC) curve using the orange points (square symbol). (Hint: For
ATC and AVC, plot the points on the integer; for example, the ATC of producing one pair of boots is $200, so you should start your ATC curve by
placing a green point at (1, 200). For MC, plot the points between the integers:…
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- Isoquant curves and isocost curves are tools that can explain how a firm might best respond to changes in the production environment. Present an example of an isocost curve where labor and capital are the two inputs, and explain what it is using language someone not trained in economics could understand. Present an example of an isoquant in the same diagram you used for your isocost curve, and draw the isoquant so it cuts the isocost curve twice. Explain what an isoquant is using language someone not trained in economics could understand. Label the two points A and B, where the isocost and isoquant curves intersect. Present a logical argument that explains why the firm should operate neither at point A nor point B, and present a point that would be optimal by drawing a new isoquant curve in the diagram. Add a second isocost curve to your diagram such that the firm is spending more money on inputs. Add a third isoquant to your diagram to show a firm that would become more capital…arrow_forwardQ)solve it correctly The marginal products of capital (MPK) and labor (MPL) are, respectively, MPK = 2000 units; MPL = 1500 units. The input prices are: PK = $10/unit; and PL = $150/unit. To minimize production costs, the firm should A. increase both capital and labor B. decrease both capital and labor C. increase capital; decrease labor D. decrease capital; increase labor E. do nothing; costs are minimizedarrow_forwardOutput is produced according to production function y = f (L, M) = L2 M2, where L is the number of units of labor and M is the number of machines used. The cost of labor is $w per unit and the cost of machines is $p per unit. a) Draw a graph showing the cost-minimizing input bundle as a tangent point between the isoquant curve and an isocost line. b) Find marginal products MPL and MPM as functions of L and M. c) Use the slope condition for tangent point and the production function to solve for the conditional input demand functions L(w, p, y) and M(w, p, y). DRAW THE GRAPH AND SHOW YOUR WORKarrow_forward
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