ECN 303 Practice Problems for Ch.

8, 9, 11, 12 a and c in the textbook.

The problem with goods A and B

A firm produces goods A and B. For good A, PA=$2, AVCA=$1.40, and QA=50,000 units. For good
B, PB=$3, AVCB=$2.20, and QB=75,000 units. The firm’s total fixed costs come to $100,000.
a. Find the profit contribution for each good.
b. At current output levels, the firm allocates its fixed cost: $25,000 to A and $75,000 to
B. Should the firm continue to produce both goods in the short run? In the long run?

Cobb-Douglas Production Function Problem

Suppose Q=100L0.5K0.4 , K is fixed at 5 units. PL= $10 and PK=$20.

a. Develop the equation relating short run cost to Q, i.e., find short run C(Q).
b. Find the equations for: AFC, AVC, SAC and SMC.
c. Determine the level of output that minimizes AVC.
d. Determine the level of output that minimizes SAC and determine the minimum value for
SAC.
e. If the firm faces demand Q=3,600 – 200P, determine the short-run profit maximization
price, level of output, and profit.
f. Determine the firm’s long-run cost function.
g. Explain the shape of the firm’s LAC (K is no longer fixed).