EC 501/Zenginobuz

Boazii University/Fall 2011

INTERMEDIATE LEVEL PROBLEMS ON PRODUCER THEORY 1. TRUE OR FALSE. Explain a) The average variable cost curve must always be U shaped. b) If the average cost curve is U shaped, then the marginal cost curve must cross the average cost curve at the bottom of the U. c) The cost function c(y) = 10+ 3y has marginal cost less than average cost for all levels of output. d) Average cost can never increase while marginal costs are declining. e) The area under the marginal cost curve measures total variable costs. f) Price equals marginal cost is a sufficient condition for profit maximization. g) A firm has the cost function c(x) = x2 + 100 if the firm's output x is positive and c(0) = 0. If the price of output is lower than 20, and the firm maximizes profit, then the firm will produce 0 output. h) A firm's total cost function is 4q2 + 100q + 100. Find the average variable cost when the firm produces 25 units of output. i) A firm's production function is f(x1,x2) = x1 + 2x2. This means that x2 is twice as expensive as x1. j) If the price of the output of a profit maximizing competitive firm rises and all other prices stay constant, then the firm's output cannot fall. k) A firm has two variable factors and a production function f(x1, x2) = (2x1 + 4x2)1/2. The marginal rate of technical substitution between x1 and x2 is constant. l) If the value of the marginal product of labor exceeds the wage rate, then a profit maximizing competitive firm would want to hire less labor. 2. The marginal cost curve of a firm is MC = 6y. Find the total variable cost of producing 8 units of output. 3. A firm has the cost function c(y) = 3y2, where y is the units of output produced per month. The firm faces a competitive market for its product, with a price of $36 per unit of output it sells. How many units of output should this firm produce per month? 4. A new metal alloy is discovered that uses copper and zinc in fixed proportions where each unit of the alloy requires 3 units of zinc and 4 units of copper. The price of zinc is $5 per unit and the price of copper is $2 per unit. If no other inputs are required, what is the average cost per unit of output when total output is 2000 units? 5. In a certain industry, the supply curve of any firm is Si(p) = p/2. If a firm produces 3 units of output, what is its total variable cost? 6. A competitive firm has a single factory with the cost function c(y) = 4y2 + 89 and produces 28 units in order to maximize profits. Although the price of output does not change, the firm decides to build a second factory with the cost function c(y) = 8y2 + 39. To maximize its profits' how many units should it produce in the second factory?

7. The production function of a competitive firm is described by the equation = 2 1 1 . The factor prices are p1 = 1 and p2 = 36 and the firm can hire as much of either factor it wants at these prices. Find the firm's marginal cost function. 8. A firm uses a single input to produce its output, which is sold in a competitive market. It gets quantity discounts on purchases of its input. If it buys x units of input, the price it must pay per unit of input is (13/)x + 3. If it buys no inputs, it does not have to pay anything. The firm's production function is = 19 4 2 . If the price of the firm's output is 1, find the profit-maximizing amount of input it will buy. 9. When a farmer applies N kgs. of fertilizer per square meter, the marginal product of fertilizer is 1 - (N/200) bushels of corn. If the price of corn is $3 per bushel and the price of fertilizer is $0.30 per kg., then how many kgs. of fertilizer per squaremeter should this farmer use in order to maximize profits? 10. Suppose that the only inputs used in production of cars are steel and labor and the production function is Cobb-Douglas where , = 0.5 0.5 , where S is tons of steel and L is units of labor. You can locate your plant either in country A or in country B. In country A, steel costs $7 a ton and labor costs $7 per unit. In country B, steel costs $8 per ton and labor costs $6 per unit. In which country should the company locate its new plant so as to minimize costs per unit of output? 11. A competitive firm has the cost function = 5 3 40 2 + 96 + 50. What is the minimum price that will induce the firm to produce a positive amount of output? 12. Suppose the total costs are 4 2 + 100 + 100, where s is the output. Find the average variable costs for s = 25. 13. A competitive, capitalistic firm produces gift-wrapped pieces of the Berlin wall, using the standard Marxian inputs, K and L. The production function is = + 2 1/2 . The price of capital, K, is 2 and the price of labor, L, is 3. Find the cost function for this enterprise. 14. A competitive firm has a single factory with the cost function = 4 2 + 89 and produces 28 units in order to maximize profits. Although the price of output does not change, the firm decides to build a second factory with the cost function = 8 2 + 39. To maximize its profits, how many units should it produce in the second factory?