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,^ )_ . _^,, {- maifi |.ohtlu, pu!

-l3,vt g
Je cl'.r.rr A'
--'li S-"j,l^
and Analvsit'=:*.I*+F:tj'
CHAPTER6 ProductionTheorv , .:.i;..iriy 4'*v

would be some of the problemsof measur-


6-9. When estimatingproduction functions,what
ing output and inputs for eachof the following?
a. A multiProduct firm
b. A constructioncomPany
c. An entire economy

Problems
ton- function
6-L. UsetheProduction
gon Q: loKo's;o'o
'Il tO to completethe following productiontable'
that
nies, Rate of CaPital InPut (K)
lan- 6 24.5 56.3 71.8
um- Q-t 5
, rh e 30.3
J
45.5
Juc- ,) 27.3
ows 1 10.0 29.3
)ou- I 2 A 5 6 Rate of Labar InPut (L)
gon
constant'or increasing?
'
f€- a. For this production system,are returns to scaledecreasing,
Explain.
28 per unit,andthe firm
b. supposethe wagerate is Rs.28,the price of capitalalso is Rs'
four units of capital and
currentlyis producing30.3units of output pei period using
Explain'What would be
tion two units of labor.Is this an efficient,"roui"" combination?
(HINT: Comparethe
rput a more efficient (not necessarilythe best) combination?why?
margirialproductsof capitaluttd lubot at the initial input combination')
questions.
cm- 6-2. Use the datafrom problem 6-1 to answerthe following deter-
a. If the rate of input is fixed at three and if output sellsfor Rs' 5 per unit'
G-\ "upitut
mine the total, average,and marginal product functions and
the marginal revenue
cfa
'e it nroductfunction for labor in the following table'
APt MPr MRPL
L TPz
ong
0
' Lt- 1
2
rUIIl
3
af-
4
5
)ro-
6

per unit,how muchlaborshould


9eS'
using the datafrom part (a),if the wagerate is Rs.28
es.
be employed? , E _^-.--rr r^r o- , .
uc- output is Rs'5 per unit' determrne
c. If the rate of labor input is fixed at 5 and the price of
t of and the marginalrevenue
the total,average,anf,marginalproductfnt "iiottt for capital
lde
product of capitalin the following table'
::. -:
?n 6 , PART III Production and Costs

0
1
2
J
.+

5
o

d' Using the data from part ("),]l the price of capitalis Rs.40 per unit, how many
units
of capitalshouldbe employed?
6-3' Everest Publicationshas kept the following data on labor input and production
of text-
0{\ books for eachof eight prodiuctionperiods.
ProdactionPeriod I 2 3 4 I
LaborInpnt 4 3
Outputof Books
(totalproduct) 260 190 310 240 110 290 300 50

"a. IJse the data on labor input and total product to compute the averageand marginal
product for labor input ratesfrom one to eight.(Assumethat a zero labor input
rvould
resultin zerooutput.)
b' Usingtwo graphssimilarto that of Figure6.3,plot the total productfunction
in the up-
per graph and averageand marginal product functions in ttre lower graph.
On the
graphidentifythe rate of labor input: (1) wheretotal output is at a *uri*u*
and the
correspondingpoint where marginal product is zero;(2) where there is an inflection
point on the total prociuctfunction and the correspondingpoint where the
marginai
productfunctionis at a maximum,and (3) wherethe slopeof a line drawn
thrcughthe
origin to a point on the total product function would havi rnaximumslopeand the
cor-
respondingpoint wherethe averageproduct curveis at a maximum.
c' Given that the objectiveof the firm is to maximizeprofit,carlyou determinefrom
these
datahow muchoutputshouldbe produced?If not.what adtlitionalinformation
would
you need?Canyou think of any circumstance rvherethe firm would usemore than six
units of labor per periodin this productionprocess?
k'\ o-+_The marginalproductof labor functionfor AiunachalTi'adingCompanyis givenby the
equation

M PL:1 0 # -
t-'

Currently.the firni is using100unitsof capitaland 121unitsof i:rbor.Giventhe very


spe-
cializednatureof the capitalequiprnent,it takessix to nine monthsto increase
the capi-
tal stock,but the rate o[ labor input can be varieddail1,. If the price of laboris Rs.10 per
unit and the price of output is Rs.2 per unit, is the firm operating
efficientlyin the short
run? If not, explainwhy,and determinethe optimalrate of laborlnput.
i'\ ,t/ 6-5. For eachof the followingproductionfunctioni,determinewhethenretumsto scalearede-
creasing,constant,or increasing.
CHAPTER6 productionTheoryandAnatysis,+--*i*a-
'ii't''1-:5i-
a . Q:2 K + 3 L + K L
b. Q :20Ko'6Lo5
c. Q:1 0 0 + 3 K + Z L
:
d. Q: SKoLb,wherea -t b : 1
e.Q:llK"Lb,wherea * b :1.2
-=.>
f'Q=K /L
6-6' For restructuringof cAG office andAG offices,
on an experimentalbasis,the government
.1 employs charteredaccountants (CAs) to audit corporatetax returnsurrouoo?t""f;;;;;
'units Lt - ^,' audit smallfirms' returns.cAs are puio Rr. 3r,200permonth,while the
salaryof a book-
keeperis Rs' 18,200'Given the currentstaff of cAs
and bookkeepers, a studymadeby an
economistshowsthat addingone month of a cA's time
I text- to audit corporatereturnsresults
in an additionaltax collectionof Rs.52,000.In contrast,
an additionalbookkeeperadds
Rs.41,600 per month in additionaltax revenue.
a' If the department'sobjectiveis to maximizetax revenue
collected,is the presentmix
of CAs and bookkeepersoptimal?Explain.
b' If the presentmix of cAs and bookkeepersis not
optimal,explainwhat reallocation
is,shouldthedeparrmenr
hiremorecAi andfewerbookkeep_
:i::ii:H:fl",
6-7. Theproductionfunctionfor Goa Sailboats
Ltd.,
rginal is
vould t1 - 1 "' 0.s10.s
Q :20K
with marginal productfunctions
le up-
n the
rd the ' .- . Ko : 1 0
MP *" 4
0.,
a n rt
orru MPr: tO#;
K
:ction
rginal a' If the price of capital is Rs.5 per unit and the price
of labor is Rs.4 per unit, determine
the expansion path for the firm.
th the
e cor- b' The f'i.f culeltly is producing 200 units of
output per period using input rates of L :
4 and K : 25.Is this an efficient inp,r1sgm6inationf
Wny o, why not? If not, cleter_
these mine the efficient input combination for produci.rg
un ouiprrt raie of 200.what is the
t ould capital_labor ratio?
an six c' If the price of labor increasesfrom Rs.4 to Rs.
8 per unit, determine the efficient input
combination for an output rate of 200.what is the
capital-laborratio no*z w6ut ini,ri
ry the substitutionhas the firm made?
6-8' For the productionfunction :20K0.Los
vr v
G Q determinefour combinationsof capitaland
labor that will produce 100 and 200 units of output. plot
these
-- points
r-^-^-"on a graph and use
them to sketchthe 100_aird 200_unitisoquants.
9 the price of one unit of labor is Rs. 10 and the price
j46 of a unir of capital is Rs.
G f.:t:"tt
/ spe-
a' use this information to determine the isocost
capi- ' equationscorrespondingto a totai cost
0 per of Rs.200and Rs.500.
b. plot thesetwo isocostlines on a graph.
short
c' If the price of labor falls from Rs. 10 per unit
to Rs. 8 per unit, determine the new Rs.
'ede- line and plot it on the samediagram used in part (b).
C* a o-lu'
a 1^ uonsrder
\ ) ^199,t-:o"orrtrvo firms, A
' ?ld A with the following production functions:
Firm A: Qa : I00Ko.8Lo.2 Firm B: en: I11Ko.-sLo.s
,,,.
iiq PART rlr Productionand Costs
,r:,il
a n d llu n it s o f la b o r, wh a t is t h e o u t p u t ra t e f o r
a . If bothfirmsuse25unitsofcap it a l
eachfirm?
b .Ifth einputpricesaler:Re.1an d r, v : Re . 1 ' is t h e in p u t c o mb in a t io n K : 2 5 a n d L
:25 efficientfor firm AZ For firm B?
: 25 is not efficientfor either firm A or firm B' 6-
c. If the input combinuiionK 25 andL:
for eachfirm' (NOTE: Do not calculate
cleterminethe efficientratio of the t'uvoinputs that is' find the
unique valuesf"t ;<;;i; but only the rxio of K to L thatis efficient;
input ratio definedby the expansionpath') ,r- r +,{ hqc r,ce^reo
r n 6 . 1- |.Th e EconomicP lanningDepartm e n t o f Ha r-v a n a Ch e mic a ls L t d ' h a s u s e d re g re s s r o n
as
G. > analvsisto estimatethe firm's productionfunction
l\Q : 3 + 0 ' 2 5ln K + 0 ' 7 5ln l

where"ln" clenotes the naturallogarithmof the variable'


a.convertthisproductionback t o it s o rig in a l(i. e . , mu lt ip lic a t iv e o rc o b b -
the antilogarithrnof both sidesof the equation')
Douglas) torm. iarNZ'Find
of labor is Rs' 200per unit' and the price of
b. If the capitalstockis fixeclat 16,the pil""
10per unit' determinethe rate of labor in-
the firm's only product.sulfuricacid,is Rs.
put that rvillmaximizethe firm's profit'
/ . 2 - 6 a 2 .In o n e p r oductionperiod,afirmpro d u c e d a n o u t p u was
t ra t e o f l' 0units,
1,500 0 0 u sthe
in gcapital
5 0 u n it s o f crvas
input ap -
L4 ./
ital and 40 unitsof labor.In a later period,outpui :
The tase period input pricesare r 5 andw
60 units,and the labor input rvas45 units. the percentageof change
: 10.Determinetotal factor productivitvin eachperiod and
in that prociuctivitybetweenthe tu'o periods'
100unitsof outputrvith any of the following
r _I) 6_13.A firm hasdeterminedthat it canproduce
q
\ i"out combinations:
6
Labor

20 1
16 2
12 J

11 4
9 6
1 9
-5 l3

labor?
sulrstitulion beti'veen3 and 4 units of
a. whzrt is the marginal rate of teclttltic.al
\\/liat is it betweeir 5 and 7 urlits of capital?
cletermineclfrom tiris data? Explain'
b. Can the margin:rr-pr"J".t of labor be if cap-
to scale.what output rate rvill be pr-oduced
c. Assuming there al e constant I eturns
ital is 24 and labor is 6?

Problems ldequiring Calculus

D,\ 6-14. Given the production funqtion


d
Q, - AKLFN
------7

,,
t'
CHApTER 6 productionTheoryand Analvsi, '.:ii,$..
.i:..

where e is the rate of output and K .L,and N representinputs of capital,labor,andland,


, resPectivelY,determine
l. a. The ,p""ifi" conditions(i.e.,valuesof a, F, and b) under which returns to scalewould
L be increasing,constant,and decreasing'
b. The equationfor the marginalproductfunctionfor eachinput.
by
B, 6-15. A productionprocessusesonly one input, labor,and is described the followingpro-
rte C( ,\ duction function:
he
Q : 25L2
-+
ron
(NOTE: This function is applicable only for. labor input rates between 0 and 75.)
Over what output rangesare marginalreturnsincreasing,decreasing(but still positive),
and negative?
6-16. GuwahatiTyres, a smallproducerof automobiletyres,hasthefollorvingproductionfunc-
bb- tl tron:
L<-
30I
0:100K0s10s
During the last productionperiocl.the firrn operatedefficientll' and used input ratesof
'ln-

100ancl25 fot capitaland labor,respectively'


)ap- , a. What is the marginalproductof capitalandthe marginalproductof labor basedon the
was inPut ratessPecified?
.dw b. If the priceof capitalwasRs.20 pet unit,whatwasthe wagerate?
Lnge c. For the next productiol period,the price per unit of capitalis expectedto increaseto
Rs.25,whileihe wagerate and the laborinputwill remainunchangedunderthe terms
ving efficientproduction,
of the labor contractrvith the labor union.If the firm n-raintains
what input rate of capitalwill be used?
1-tl Giventhe productionfunction
Q.{
Q : 30K07 7r)'5

and input Pricesr - 20 and tr' : 30.


a. Determinean equationfor the expansionpath'
: 200?For : 500?
., b. What is the efficientinput combinationfor an output rate of I Q
( A g. Tirepr.oducrion funcrionfor BarodaFocdsLtd.is
G
' :20K o51tt5
Q
: : 30.Under the labor contractwith a na-
bor? The initial pricesof the inputs are lr, 20 and r
must be maintirined
tional nnion. at least the current employment level of 300 rvorkers
(However, more lvorkers can be hired if necessary.)
through the lext production periocl.
4,899 units of output. Asstiming
v"v
a. In the preyioui procluctionperioci,the firm produced
efficientproduction,whatlvastherateofcapitalinput?
the next proclLrction
b. Becausett tn" national recession,the desired level of output for
period is only 4,000units.what is the optimal rate of capital iilput?
./ function
O tO. Output for the Amritsar Farrn in Punjab is given by the prodr"rction
6ai
o : I}L0'7No'3
'''
'.iiit: and Costs
PARTlrr Production
.,i,..1i.,,.

w he reQistherateofoutput,an d t a n d Na re t h e ra t e s o f la b o ra n d la n d , re s p e c t i v e l y '
In thepreviousproductionperio d , t h g ll. T p ro d u c e d 2 ,of 6 3 3 u n it s o f o u t p u t u s in g 5 0 0 6-.
200 units labor' As the result of the
acresof land (the entire .roit'-o available)-and
progfam'100acresmust be left fallow (i'e''
farm'sparticipationin a goo"rnmentsoil-bank
,rn.rr"d1in thL next production period'
period if the samelabor input rate is used
a. what will be the rate of output in the next
togetherwith the reducedland input? l to maintainoutput at the rate achieved
b. How much additionallabor wouli be needed
in the originalperiod?Explain' , , ----- ^r ^+..-r-
6-20.Thefollowingtableshowstherelationshipbetweenhoursofstudyandfinalexamina. 15 hours
tion grades ii eachof three;iasses for a particular student,who has a total of
,/ the al::lge grade in the three
Q. s ;;;i;"r" for thesetests.If rhe objectiu" i, to maximize
to preparationfor each of these
classes, how many hours should this student allocate
classes? Explainyour approachto this problem'

Managerial ChemistrY
Economics HistotY
Hours Grade Hours Grade

0 50 030
040
1 60 150
150
o5Q 2 69 260
3 '77 366
361 6-
+ 84 41]^
414
5 90 )t+
579
6 95 676
683
7 vo 117
786
8 97 877
888
9 97 971
989
10 91 10 77
10 89

productton
metal office furniture with the follorving
6_21.Royal steels Ltd. manufactures
r / function:
L( tt
e:Z1Kor y:) e
Thefirmcurrentlyisprocitrcingbfficientlyusirrg20unitsofcapitaland50trnitsoflabor.
a' What is the raie of output? il , ,- input
and labor (i'e'' u'hat is the.ratio of the two
b. what are the relative prices of capital
prices?)Canl,oudeterminetheactualpriceoflaborarrdcapital?Explain. or why
can you determine the firm's profit? Whv
c. If output sells for Rs. ZOof"r u"it,
not?

Computer Problems
from
using the TOOLS Program(downloadable
The following Problemscan be solvedbY
or by usingother computersoftrvare'
wrvw.prenhall.com/petersen)
CHAPTER 6 productionTheoryand Anutysis
'ecttvely.,
sng 500: @
.lt of the 6-22. The capital and labor necessaryto producevariousquantitiesof bicyclesare shownbe-
low/i los''
^ production period Labor Capital
euantity
: is used 1,100 65 40
660 35 15
rchieved r,200 75 45
1,000 60 30
,xamina- 900 55 30
15houn 840 45 25
he three 1,050 60 35
of these s00 30 10
9 1,130 65 45
10 40 15

a. Useregressionanalysisto estimatequantity asa multiplicative(i.e.,Cobb-Douglas)func-


tion of laborandcapital.Determinethe estimatedequation,/-statistics,
andthecoefficient
of determination. What doesthe estimatedequationimply aboutreturnsto scale?What
arethe marginalproductequations?
b. Let the costof capitalbe Rs.15 and the wagerate be Rs.20.Determinethe equation
for the expansionpath.How much labor and capitalshoulda firm useto produce200
units of output efficiently?
6-23.Followingare dataon grossnationalproduct,laborinput,and capitalfor theTaiwanese
manufacturingsectorfor 1958-1972.
Year GNP Labor Capital
1958 8,971.4 281.5 720,153
7959 10,813.2 284.4 122,242
1960 77,132.5 289.4 725,263
1961. 12,096.5 375.8 128,539
1962 12,167.5 375.2 137,427
7963 16,347.1 402,5 134,267
7964 19,542.7 4'78.0 139,038
1965 21,075.9 553.4 146,450
1966 23,052.0 676.1 1 \ 1 '7 'td
rf labor. 1967 26,782.2 695.1 164.783
1968 29.563.7 794.3 116.864
,l'oinput 7969 73 ?16 6 816.0 188,146
1970 38.354.3 B48.4 205,841
r or why 1971 46,868.3 873.1 227,748
7972 54,308.0 999.2 239,115

Use regression analysisto estimatea multiplicative(i.e.,Cobb-Douglas)production


function for Taiwan.Which coefficientsare significantat the 0.05level?What propor-
rle from tion of the variationin GNP is explainedby variationin capitaland labor?
Does the productionprocessexhibit constant,increasing,or decreasingreturnsto
scale?Explain.
-A'
9ad.^^
,@ PART lll Production and Costs

Production Rate of OutPut Total Cost


Period (Q) gc)
1 1.0 1,800
a
L 0 L,000
a
4 1,320
4 z 1,160
5 1,560

7-2. Raipur MotorShas one fixed input, the long-term leaseon its factory building, for which
f [ the rent is Rs.5,000per production period. Use the data shown here to determineaver-
q '- b age cost,averagevariable cost,and marginal cost for eachoutput rate shown-Also,write
equationsfor total cost,total variable cost,and marginal cost-
a Tatal Variuble Cost (Rs.)
I
I 1,000
2 2,000
3 3,000
4 4,000
5 5,000
report,
7-3. Basedon a consultingeconomist's the total and marginal costfunctions for Bihar
Electronicsare
G.E TC :200 + 5Q - 0.04Q2+ 0.00103
MC : 5 -0 . 0 8 0 + 0 . 0 0 3 0 2
The presidentof the companydeterminesthat knowing only theseequationsis inade-
quate for decisionmaking.You have been directed to do the following:
a. Determine the level of fixed cost (if any) and equationsfor averagetotal cost,average
variable cost,and averagefixed cost.
b. Determine the rate of output that resultsin minimum averagevariable cost.
c. If fixed costsincreaseto Rs.500,what output rate will result in minimum averagevari-
able cost?
7-4. Given the following total revenueand total costfunctions
e6 T R: 5 0 Q
IC: L0,000+ 309
a. Determinethe breakevenrate of output'
b. Determinethe output rate necessary to earn a profit of Rs.20,000.
7-5. Tiipura Enterpriseshastotal fixed costsof Rs.20and sellsoutput at Rs.10per unit' Profit
G-7 contributionis 20 percentof price.
a. What is the breakevenrate of output?
b. What is the profit elasticityat an output rate of 20?
q-7 7-6. Dr. Bhim Singh,Vice-chancellor (vc) of chhattisgarh university, had decided on a
new budgetingsystemfor all departmentsin the university.Historically, each depart-
ment was provided with an annual budget that was essentiallythe same amount each
year. Being a trained ecOnomist,the VC has decided to allow student demandfor
coursesto determine how the University's budget is to be allocated to departments.
CHAPTER 7 Cost TheorYand AnalYsis

Each semester,everydepartmentwill receiveRs.40


for eachstudentcredit hour (SCH)
#\ -

taught.Forexample,athree-creditcourseforfallsemestern-rightenrollthirty-fivestu-
the departmentwould receive
dents,thus generatingL05SCH.r'or ofie.ring,hut"otttse,
Rs.40x 1o5scH).
Rs.4,ioo(i,-e.,
eachof four universitydepartments:
The following table showsselectedcostdatafor

Number of SaIary Cttst Variable Cost


Faculty (Fixed) (Rs.) per SCH (Ril

ich 10 500,000 3.00


Economics
er- 15 510,000 2.00
English
"ite 8 380,000 7.00
Physics
7 200,000 3.00
Physicaleducation

credit hoursfor eachdepartment'


Determinethe breakevennumber of student
maximizethe sizeof its budget'what change
b. If the objectiveof eachdepartmentis to might result from
in the type of off"rings arrdassignmentof faculty to courses
"ourr"
sucha budgetingsYstem?
decliningsteadilyfor severalyearsin phys-
Supposethat studentcredithourshavebeen
rapid$ in economics'Given thesetrends'
ical education,while they havebeengrowing to
har what advantages rvouldttie tt!* budgetingsystemoffer compared
and Jirudrrurrtuges
the one PreviouslY used?
per unit'Their total fixed
_ 7-7. Three firms in the sameindustry atl sell their product at Rs.2a
^
L\ - / cost and averagecostper unit are shorvnbelow:

de-
r,000
Total Fixed Cost (Rs.)
lge
Average variable cost IJ 10

a 'Wh a ti sth e b re a ke venoutputr atefor eachfir m?{


outputrateof 200?
b' Whaii, tt'" p'otit elasticityfor eachfiry 1t an
leastleveraged?
c. which firm is the mostlevlraged?whichis l_he peryearo1"otpotut".
arbitrarily"*'ig"' Rs'4,00'000 F:d ":"-11:11
L\ t "l'' Insurance
/- r--.r 7-8. ShimlaLife '-
-;;^^:;:;r;:- *. *utiuger of the Southern Region
Southern opening
openinl
Regionis considering
considertng
to each localoffice.fft" -",.",oer iakhsand
"*p".rr"
an officein Bangalore. He estimates that revenuefor tliis otficl wbuldbe Rs'20
expenses rvouldbe:
Reni 50.000
Labor 6,00,00i)
rfit Taxes 50,000
Utllities 60,000
Advertising 2,50,000

can a-profit be earned?)


Shouldthe office be opened?(That is'
ta
LI L-

rch n7 - g .SamartlrRajnayakhasin v e s t e a n s . 3 0 ,of


0 0Rs.
0 in a h a rd
10.000 rvthe
for a relast
s t oyear'This
re . B u s inprofit a safter
e s s l ris beengood
,\ and the storeshorvsan accountingprofit
for G
taxesandafterpavmentofans.z"o,ooosalarytoMr.Rajnayak.Tlrissalaryislessthanth
lts. job. considering ihe risk involved in the hardware
Rs.40,000he could *ak" ui another
--7
,/

PARTlll Prothtciionund Costs

business, he believesthat a L5 percent after-tax rate of return is appropriate fof this type
of investment.
a. Given this information, calculate theeconornicprofit earnedby Mf.Rajnayak.
l
b. What accountingprofitwould the firm haveto earn in order for the firm to break
"n.o
in terms of econornicprofit?
7-ra.Sikkim Dental ProductsLtd. manufacturesfEriseteeth with a pliable basethat allorvsone
siz[ to fit any mouth.A set of thesedenturessellsfor Rs.80.Fixeclcostsare Rs' 2,00,000
q -v per productionperiocland the profil ccntribution is 40 percentof price-
i. determine tfie profit elasticity at output rates of 8,000,10,000,and 12,000units'
b. For the next productioirperiod,fixeclcr:stswill increaseto Rs.3,00,000 due to a major
capitalinvestmentprograrn,but the ne'n'anclmore efficient rnachinerywill result in
lower variatrleproducticncostsso that variablecostper unit will be reducedby Rs8.
If price is unchanged.recttmputethe profit elasticityat output ratesof 8,000,10,000,
and 12,000urrits.
c. What changein the risk-return trade-off has the companymade by this capital in-
vestmentprogram?
4 -f 7-11Manipur Eleitronics Ltd. producesele.ctroniccomponentsfor an antimissilesystenr-Each
compbnentsellsfor Rs"900,ave,rage variablecost is constantat Rs.700,and total fixed
costis Rs. t0,000.
a. Determinethe breakevenrate of output.
b. Demonstratethat the profit elasticitydeclinesas the nutput rate increases.
c. Showthat for any rate of output, profit elasticityincreasesif fixed costincreasesand
this elasticityI'ill desreaseasvariablecostper unit decreases.
7-12. SouthernA*irlvays, a smallregionalairline,hasa daily late eveningflight into Atlanta-The
G& planemustbe inAtlanta at 8:00a.u. eachmorningfor a flight to Richmond,Virginia.Un-
lortunatell,.the chargefor a planeremainingovernightin Atlanta is $500.One alternative
is to schedulea 9:00e.v, flight to Gainesville,Florida (a one-hourtrip), and a 6:00a.v.
flight back to Atlanta.Thereis no chargefor the overnightstay at Gainesville.However,
the flights to and from Gainesville will averageonly about ten passengerseach at a one-
way fare of Rs.50.The opeiating costof the plane is $600per hour.The company'stotal
fixid costs(which are unaffectedby the clecisionto be madehere) are allocatedto each
flight at the rate of $300per hour. Shouldthe plane stayin Atlanta overnight,or should
flightsto a.ndfrom Gainesviliebe scheduled?Explain your decision.
7-73- A tirm is consideringthe rental of a new copyingmachine.Therental telms of eachof the
et o7 three machinesunder considerationare givenhere:
Costr (Rs.)
fuIachine MonthlY Fee Per CoPl'

A 1,000 + 0.03
t) 300 + 0.04
C 100 + 0.05

How many copiesper month rvould the firm have to make for B to be a lower total cost
machinethan Cl For,4 to be lower costthan B?
ay 7-14. During the lastperiod,the sumof averageprofit and fixed costsfor a firm totaled Rs.1.00.000.
\

CHAPTER 7 CostTl'teoryandAnal.y,sis

Unit saleswere 10,000.Ifvariablecostper unit wasRs.4,what rvasthe sellingpriceof a unit


of output?How much would profit changeif the firm producedand sold 11,m0unitsof out-
put? (Assumeaveragevariablecostremainsat Rs.4 per unit,)
7-15. The economicsdepartnnentof Gujarat Drilling, a producerof natural gas,hasestimated
L). "v I the long-run total cost ftrnctionfor natural gasdistributionto be
one
't'C :2,008 - 0.A04Q3
,000
where IC is total costanclQ is ndllions of cubict'eet(VIMCF) of natural gasper cian
a. Determine an equation for the long-run averager:<lstof clistributingnaturaigasand
ajor ptot it on a graplt over the raoge1.A g < 150.
It in -
b. At present,Gujarat llriiling prodr;cesbut doesnot distribute natural gas.Interstate
Ls. 8 . Pipelineis the onll' distributorc,fgasin the region,andit carriesabout100I\4fuICF per
0{)0, day.Managelnentat Gujarat Drilling estirnatesthe regionaln:arket wiil growfrom 100
to 150MMCF per day and thinks it rnight be able to captureabout 50 percentof the
I in- inci'easein the sizeof the market.-[uterstatelias the capacityto deliver200N{MCFper
day'.\4ril1Gujarat Drilling be able to competeagainstInterstatein the distributicnof
:ach gas?That is,tvill Gujarat Drilling be ableto earn a normalretufn at the outputrate as-
ixed sociatedwith that part of the rnarketit expectsto capture?Expiain.(AssumeInter-
statehas the sarnetotal costfunction as Guiarat Driiline.)

Froblems Requiring Calculus


and
r 7-16.Econornistsat NagalandEnterprisesusedtime-series
dataic estimatethe folio*'ingtotal
The /., vl costfuuc{.ionfor the l'irm:
L\
Un-
,/' TC= Z0A- 2e + A.0SO'
rtive
4..M. rvhere fC is total cost and Q is the output rate.
)ver, a. Determine an equation for the average cosf function. Plot this function, zinclfind the
one- output rate that minimizes average cost.
iotal b. Is the prt-rductionprocesscharacterized bv Cecreasing.
constant.or increasing returns
:ach to scale?
ould lf the marketpriceof outptttis Rs.4.32per rmit.is therea scaieof piant thativc-ruld
al-
lorv the lirm to earn an eccrnomicprotlt or at least to trreak even I
f the .l,1 7-11. Given the total cost functi,rn for Mizcran'' Enterp; ises:
Cr TC:7aaQ' - 3Qt + G.l?' '
a. l)etermine the averase cost function anC the rate irl osipill thal ''vill mininrizeaverage
cost.
b. Determine the rnarginal cost funciion anclra"teuf oulpilt that r,villminimize marqinal
cost.
c. At rvhat rate of'output does at'elage ccst eciuairnarginalcost?
[- 7-18. Madras Pens Ltcl. produces)ballpointpens.Fixed costsin each prcduction perioclare Rs.
\ - \.t
\ \w I
cost 25,000,and the total variablecost(WC', is givenby the equation
TVC:0.15C + 0.18'
.000.
whereQ is thr:rateof output.Whatoutputrater,,,ould
minimizeaverage
totaicost?
PART III Productionand Costs

Giventhe total costfunction


G ln '-t'' ?C: i..ooo+ zo1Q- gQt + 0.25Q3
(i'e'' wc' FC' AFC'
a. Determine the equationfor eachtotal and per-unit cost function
AVC,AC,andMC). -, firm to break even'
would allow the
b. Determinethe lowestprice for output that
allow the firm to cover averagevari-
c. Determinethe lowestprice for output that would
ablecost.
pet unit and has a total cost function
Q5 7-zo calicut Enterprisessellsits output for Rs.2O
T C: 1 6 + L iQ - g Q t + Q u

a. Determinethe firm's total profit function'


b. Determinethe firm's marginalcostfunction'
of B units'
Determinethe profit elasticityat an output rate

Computer Problems
the TOOLS program (downloadablefrom
The following problemscan be solved by using
s,1ltware'
,y't"*pt"tft"iicomlpetersen) 9r by using 9lher :or.nputT
and the average cost (in rupees)of producinga
7-21..T\equantrty produced(in thousands)
smalltoy at different plantsare shownhere'
Average
ptant cos,t(is.) Qusntity (Quantitil2

1 0.75 100 10,000


a
L 0.40 204 40,000
3 0.50 1.40 19,600
+ 0.60 264 67,600
5 0.45 160 25,604
6 0.55 r20 14,400
1 0.70 280 78,400
8 0.45 180 32.400
q 0.40 220 48,400
i0 0.45 240 57,600

functionof quantitypro-
a. Useregression analysisto estimateaveragecost as a linear
and Joefficientof determination' Doesthe equa-
duced.Writetheeluation,r-statistics,
or constantreturnsto scale?
decreasing,
tion erhibit increasing.
glst as a linear function of quantity and
b. use regressior-ianalysisto estimateaverage
squared. datafor plant 1 rvouldbe 100
quantitysquared(e.g.,the quantityanil qu"antrty
and coefficientof deter-
Determinethe equat.iott,l-ttotittics,
and 10,000,respectively).
over what rangeof output are
mination.At what quantityis averagecosta mjinimum?
decreasing returnsto scale?
increasingreturnstf scateinAicated?What atr'ut
nlinimum output necessaryto break even
c. Usingthe resultsfrom part (b), what is the
at a priceof Re' 0'55?
rate and total cosi for eachperiod
1 1'' A plant hasbeenop"ru,ing for 10periods.The otrtput
are shownhere.
CHAPTER 1 CostTheorYandAnalYsis

TC,(Rs.)
1' 4 1,300
2 12 7,700
3 21 4,400
4 16 2,900
5 30 10,500
6 11 1,900
7 6 L,250
8 27 9,500
9 19 3,550
10 8 L,400

a. Use the multiple regressiontechniqueto estimatethe cubictotal costfunctiotl:


T C: d s + d rQ * d rQ t + d rQ t
p3')
(Hint: Createtwo additionalvariables,Qz andQ3,andthenregress7C on Q, Q'-,and
b. Use the estimatedtotal costfunction to deriveequationsfor averagecostandmarginal
cost.
10pe-
c. Using the samedata,computeaveragecostsby dividing TC by Q fot eachof the
quadraticaverage costfunc-
lga riods.Using the computedaveragecost data,estimatethe
ticn.
AC ==egf- erQ *
"rQt
How do your resultscomparewith the estimatedaveragecost equationfrom part (b)a

?ro-
lLla-

and
100
:tef-
are

,Ve1}

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