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# Homework I: BUSECN 1010: Managerial Economics, Spring 2017

## Due Wednesday Jan 25, 2017 in class. No late submissions.

Instructions:
Submit a paper copy of the homework in class.

1. The U.S. Department of Agriculture is interested in analyzing the domestic market for corn. The
USDA's staff economists estimate the following equations for the demand and supply curves:
Qd = 1,600 - 125P
Qs = 440 + 165P
Quantities are measured in millions of bushels; prices are measured in dollars per bushel.

a. Calculate the equilibrium price and quantity that will prevail under a completely free market.
b. Calculate the price elasticities of demand at the equilibrium value.
c. The government currently has a \$4.50 bushel support price in place. What impact will this
support price have on the market? How much will the government be forced to purchase corn
under a program that requires them to buy up any surpluses?
a. Set Qd = Qs to determine price.
1600 - 125P = 440 + 165P
1160 = 290P
P=4

## Obtain Q by substituting into either expression.

Qd = 1600 - 125(4)
Qd = 1600 - 500
Q = 1100 P* = \$4, Q* = 1100
4
b. For the Own Price Elasticity of Demand E = -125 × = -0.45 (approximately)
1100

## c. Calculate Qd and Qs at the \$4.50 price.

Qd = 1600 - 125(4.5)
Qd = 1037.5

Qs = 440 + 165(4.5)
Qs = 1182.5
Surplus = Qs - Qd = 1182.5 - 1037.5 = 145
The support price would create an excess supply of 145 million bushels that the government would be
2. You are a manager for Office Depot, a major manufacturer of office furniture. You recently hired
an economist to work with engineering and operations experts to estimate the production function
for a particular line of office chairs.
The report from these experts indicates that the relevant production function is 𝑄 = 2𝐾 1/2 𝐿1/2
where K represents capital equipment and L is labor. Your company has already spent a total of
\$8,000 on the 9 units of capital equipment it owns. Due to current economic conditions, the
company does not have the flexibility needed to acquire additional equipment. Workers at the
firm are paid a competitive wage of \$120 per day and chairs can be sold for \$400 each.

a. What is the Marginal Product of Labor? [Hint: Put K=9 in the production function and then take
derivative with respect to L]
b. What is your optimal labor usage? [Hint: VMPL = w]
c. What is the output created with K = 9 and optimal L.
d. What is your maximum profit? [ Profit = Total Revenue – Total Cost ]

1 1 1 1 1 1
a. 𝑄 = 2 × 𝐾 2 × 𝐿2 = 2 × (9)2 × 𝐿2 = 2 × 3 × 𝐿2 = 6 × (𝐿)2
1
1
𝑀𝑃𝐿 = 6 × 2 × (𝐿)−2

## b. Optimal labor to hire decision formula: 𝑉𝑀𝑃𝐿 = 𝑤 → 𝑃 × 𝑀𝑃𝐿 = 𝑤

1
1
Hence plugging in, 400 × 6 × × (𝐿)−2 = 120
2

1
Hence, 𝐿−1/2 = → 𝐿1/2 = 10 → 𝐿 = 102 = 100
10

## c. Output: Plug in K= 9 and L =100 in the production function

1 1
𝑄 = 2 × (9)2 × (100)2 = 60

## Total Cost = 8000 + (120 × 100) = 20,000

Profits = 𝑇𝑅 − 𝑇𝐶 = 4,000
Thinking through Question 2:
For part a
Since K=9 is fixed, if we plug it in the production function
Q= 2 * (9)^1/2 * L^1/2
Now , Q is simplified and only in term of L.
Take a derivative with respect to L to find MPL.
** This is where producer determines labor productivity

For part b
P * MPL = w
Substitute for P, w (given in the problem) and MPL (from part a). Solve for optimal L.
**This is where producer decides on how many L to hire.

For part c
Plug K= 9 and L( from part b) to find Q.
** This is where producer determines output produced.

For part d
Total revenue = P * Q
Total cost = Fixed capital cost (8000) + w * L
Profit = Total Revenue - Total Cost
** Producer will be happy if his business decisions produces profits :D