Suppose that Pervez, a pharmacology student is spending \$120 budget on paperback novels

November 24, 2016

1. Suppose that Pervez, a pharmacology student is spending \$120 budget on paperback novels and used CD’s. For novels, MU/P = 5 ; for CD’s, MU/P = 4.

a. Is he maximizing his utility? Why yes, why not? Explain

b. If not should he consume more novels and fewer CD’s o more CD’s and fewer novels? Explain briefly

2. Gomez runs a small pottery firm. He hires one helper at \$12,000 per year, pays annual rent \$5,000 for his shop, and spends \$20,000 per year on materials. He has \$40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him interest rate 10% annually if alternatively invested. He has been offered \$15,000 per year to work as a potter for competitor. Total annual revenue from pottery sales is \$72,000. (2 points)

All underlying work must be shown

a. Calculate accounting cost for Gomez pottery firm.

b. Calculate economic cost for Gomez pottery firm.

c. Calculate accounting profit for Gomez pottery firm.

d. Calculate economic profit for Gomez pottery firm.

e. Should Gomez stay in the pottery business or not? Explain

3. You have been hired by the Tootsie Roll Company to analyze their production process. Your predecessor in the position left you with the following table:

Number of Workers

Total Output

(thousands of bags of

Tootsie Rolls)

Marginal Product

Average

Product

0

0

1

4

2

10

3

17

4

23

5

28

6

31

7

32

8

32

9

30

10

25

(NOTE: Tootsie is currently using 3 units of capital regardless of output produced. Price per one unit of capital is \$50, Tootsie pay wage rat 0f \$100 per day and sells its product in the market for \$50 per unit)

(a) Fill in the blank values in the table above.

(b) Identify the fixed and variable inputs

(c) Do the values in the table represent short-run or long-run production relationships? Explain why

(d) For what range of output (Q or number of workers) does increasing marginal productivity (returns) occur?

(e) For what range of output or number of workers does diminishing marginal productivity (returns) occur?

(f) For what range out output or number of workers does negative marginal productivity (returns) occur?

(g) With an addition of which worker does the Law of Marginal Diminishing Returns set in?

(h) Why does the Law of Diminishing Marginal Returns set in? Explain

4. After two quarters of increasing levels of production, the CEO of Canadian Fabrication and Design was upset to learn that, during this time of expansion, productivity of the newly hired sheet metal workers declined with each new worker hired, Believing that the new workers were lazy or inefficiently supervised, the CEO instructed the shop foreman to “crack down” on the new workers to bring their productivity. Explain carefully in the terms of production theory why it might be that no amount of “cracking down” can increase workers’ productivity at Canadian Fabrication and Design?

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