Micro Economics

  1.  Fill in the following table assuming computers are a fixed input that costs $30 per unit to rent and labor is a variable input that costs $12 per unit:

 

Computers Labor Q APL MPL FC VC Cost MC AFC AVC AC
10 0 0                  
10 1 200                  
10 2     300              
10 3   200                
10 4 650                  
10 5   136                
10 6     20              
  1. Graph the APL and MPL curves with Units of Labor on the horizontal axis and Units of Output per Worker on the vertical axis.
  2. Graph the AVC and MC curves with Output (Q) on the horizontal axis and Dollars per Unit on the vertical axis.
  3. What is relationship between APL and AVC?   What is relationship between MPL and MC?

 

  1. Sketch on one diagram the short run AVC, ATC, and MC curves for a firm with a fixed capital stock and a typical production function as shown in the bottom panel of Figure 8-2 on page 205).
  2. Suppose the town in which this firm is located passed a law requiring every business, no matter what its size, to purchase a $500 business permit.  Which of the curves would be affected by the new law?
  3. Repeat part (a) assuming the wage rate for labor rose instead of a new law.
  4. Repeat again assuming instead that a tax on all capital equipment equal to 5% of its value is enacted.

 

  1. In 1998 the price of energy increased dramatically.  Before the price surge, Kaiser Aluminum (in Spokane) had purchased the rights to buy electricity at a fixed rate.  After the price surge, Kaiser still owned these rights so they were able to buy their electricity at a much lower price than the rest of the city. (Note: these rights can be bought and sold at any time)
  2. What happened to Kaiser’s cost of producing aluminum when the price of electricity went up?  (Remember, they didn’t have to pay the higher price for electricity.)
  3. Imagine there was another aluminum plant, Alcoa, that didn’t have the rights to buy electricity at a low price.  After the price of electricity went up how did production costs for Alcoa compare to production costs for Kaiser?
  4. As it turns out, when the price of electricity was very high Kaiser stopped producing aluminum.  Does this surprise you?  Why or why not?
  5. A firm has two plants, each with different costs of production.

Plant 1: Cost = 100 + 9Q + Q2 (MC=9+2Q)

Plant 2: Cost = Q + 5Q2 (MC=1+10Q)

The firm wants to produce 200 units of the good at the lowest cost.  How much should it produce at each plant?

 

  1. Consider a competitive industry consisting of 100 identical firms each with the following cost schedule:
Output Total Cost
0 300
1 400
2 450
3 510
4 590
5 700
6 840
7 1020
8 1250
9 1540
10 1900

 

Market demand is given by the following schedule:

 

Price: $360 290 230 180 140 110 80

 
Quantity Demanded: 400 500 600 700 800 900 1000

 

  1. Draw the supply curve for an individual firm.  On a separate graph, draw the demand and supply curves for the industry as a whole.  Indicate the equilibrium price and output.  Now draw the individual firm’s demand curve on your first graph and show the firm’s equilibrium, price and output.
  2. Explain why the equilibria found in part (a) are only short-run equilibria.  What will happen to the industry in the long run?  Describe the long-run equilibrium in detail.

 

  1. Suppose w=$6, r=$10, TC=$1200.  Suppose the MRTS = 3K/4L.

 

  1. Graph the Isocost line.
  2. Find and graph the optimal choice of K and L.
  3. On the same graph, redo a) and b) for TC=$1500.
  4. Add the expansion path to your graph.
  5. With TC=$1200, compute the optimal choice of K and L if “r” rises to $15.