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Je cl'.r.rr A'
--'li S-"j,l^
and Analvsit'=:*.I*+F:tj'
CHAPTER6 ProductionTheorv , .:.i;..iriy 4'*v
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
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-'
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?
,,
t'
CHApTER 6 productionTheoryand Analvsi, '.:ii,$..
.i:..
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
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
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
de-
r,000
Total Fixed Cost (Rs.)
lge
Average variable cost IJ 10
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
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
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
?ro-
lLla-
and
100
:tef-
are
,Ve1}