PROBLEM SESSION #5
1.
Consider the following Cobb-Douglas production function for your company
Q  L1.345 K 1.50
a.
b.
c.
d.
e.
suppose both labor and capital inputs are 20 percent each, determine the approximate change in
output
What type of returns to scale characterizes this production function? How do you know?
Based on the production function, determine an expression for the marginal product of capital.
What is the marginal product of capital if 23 workers are employed by this company?
Suppose capital is fixed at 9 units. If the firm can sell its output at a price of $10 per unit and can hire
labor at $400 per unit, how many units of labor should the firm hire in order to maximize profits?
2.
Explain the difference between diminishing marginal returns and the diseconomies of scale?
3.
How would each of the following affect the firm's marginal, average, and average variable cost
curves?
a. An increase in wages
b. A decrease in material costs
c. The government imposes a fixed amount of tax.
d. The rent that the firm pays on the building that it leases decreases
4.
Carefully explain the difference between fixed cost, sunk costs and variable costs. Provide an
example that illustrates that these costs are, in general, different
5.
You are the manager of a large but privately held online retailer that currently uses 17 unskilled
workers and 6 semi-skilled workers in its warehouse to box and ship the product it sells online. Your
company pays its unskilled workers the minimum wage, but pays the semi-skilled workers $7.75 per
hour. On February 2013, you read an article reporting that your country’s government has passed a
legislation that would increase the minimum wage to $7.25 per hour over two years. Discuss the
implications of this legislation on your company’s operations and in particular the implications for
your optimal mix of inputs and long run investment decisions.
6.
You recently replace Kelsey, the manager of the Glass Division at a major conveyor-manufacturing
firm, despite Kelsey’s strong external sales record. Glass manufacturing is relatively simple, requiring
only labour and a machine that cuts and crimps the glass. As you begin reviewing the company’s
production information, you learn that labour is paid $10 per hour and the last worker produced 120
rollers per hour. The company rents glass cutters and crimping machines for $15 per hour and the
marginal product of capital is 200 glasses per hour. What do you think Kelsey could have done to
keep her job? Explain
You were recently employed by Faten Industries to evaluate their hiring practices as it relates to the
profit maximization goal of the firm. You observed that salespersons in the company are paid “w”
wages per day to sell product x. More salespersons increase sales but at a decreasing rate. Selling
more units of x does not affect the price of the product (P). You also observed that for salespersons
presently employed, w=VMPL (wage rate = value marginal product of labour) but MPL > APL. Advice
Faten based on your observation, particularly, is the firm making a profit from hiring salespersons?
Why or why not?
7.
8.
A multi-product firm’s cost function was recently estimated as
TC (Q1Q2 )  2078  0.94Q1Q2  0.22Q12  0.37Q22
a.
b.
Are there economies of scope in producing 10 units of product 1 and 10 units of product 2?
Explain
Are there cost complementarities in producing products 1 and 2? Explain
9.
10.
At Corrupt University, teachers sell grades to students. The president of the university hires a
consultant to analyze the corruption. The consultant suggests paying more to all teachers. The
president interrupts the consultant and says “What are you saying? Did I hear you correctly? How
can you suggest that we raise salaries when our objective is to reduce corruption and have fewer
teachers receiving bribes? Increasing salaries obviously goes against these objectives!” Does the
consultant have a point? Why?
The management of Waleed Industries is considering a plan to terminate a new employee. The
action stemmed from documented evidence supplied by the firm's accounting department that this
new employee did not add as much to the firm's overall output as did a worker hired two weeks
earlier. Based on this evidence, do you agree that the latest worker hired should be fired? Explain
11.
In order to stop the migration of many of the automobile manufacturing industries in your country to
neighboring countries, you have proposed a law that would give investment tax credits to auto
manufacturers. Effectively, your proposal, if passed, would reduce automakers costs of using capital
and high-tech equipment in their production process. On the evening of the vote, labour union
officials voiced serious objections to this proposal. Briefly outline the argument most likely used by
the union officials.
12.
Heard in a meeting: “In textbooks, labor appears as a variable input, and thus, a component of
variable costs. I understand, of course, that this is a simplification. I also took business economics
courses with Dr. Rosmy. I know the story. However, at our firm, labor is a fixed cost. Why? For a
very simple reason: We cannot reduce wages in this firm. When a firm is unable to reduce wages,
then, obviously, labor costs must be a component of fixed cost”. Do you agree with the statement?
Why?
13.
Angry about some type of workers earning less than another type of workers despite both having the
same productivity, a politician says. “All this is because of the profit motive. If it weren’t for the
pursuit of profits, employers would not discriminate. They would rather follow the intrinsic human
values and behave ethically”. Do you agree? Why or why not.
14.
Higher unemployment benefits should not affect the long-term unemployment rate if wages in
prospective jobs are still higher than unemployment benefits.” Do you agree? Why or why not?
15.
True or False: Explain “Fixed costs are also sunk costs”