Othman Yeop Abdullah Graduate School of Business Universiti Utara Malaysia SEEG5103 Managerial Economics Exercise #3 Problems 1.

The table below presents estimates of the maximum levels of output possible with various combinations of two inputs. Capital (K) 5 4 3 2 1 11 10 8 5 1 1 25 23 18 11 4 2 37 33 25 16 8 3 Labor (L) 47 41 30 20 10 4 51 44 34 22 11 5

Assume that a unit of output sells for $2 and that the firm currently employs two units of capital (K = 2). (i) (ii) (iii) (iv) What is the marginal product of labor when L = 4? What is the average product of labor when L = 4? What is the marginal revenue product of labor when L = 4? What is the output elasticity of labor when L = 4? If the wage rate of labor is $10, how many units of labor should the firm hire and how many units of output should it produce?

2.

The table below presents estimates of the maximum levels of output possible with various combinations of two inputs. Capital (K) 5 4 3 2 1

11 10 8 5 1 1

25 23 18 11 4 2

37 33 25 16 8 3 Labor (L)

47 41 30 20 10 4

51 44 34 22 11 5

Assume that a unit of output sells for $3 and that the firm currently employs three units of capital (K = 3). (i) (ii) (iii) (iv) What is the marginal product of labor when L = 4? What is the average product of labor when L = 4? What is the marginal revenue product of labor when L = 4? What is the output elasticity of labor when L = 4? If the wage rate of labor is $12, how many units of labor should the firm hire and how many units of output should it produce?

3.

A firm wants to minimize the cost of producing 2,800 units of output per week. It has hired a production engineer to identify alternative production technologies that will accomplish this goal. The production technologies use the different combinations of capital (K) and labor (L) that are listed below. K L 100 8 90 9 80 11 70 14 60 18 50 23 40 30 30 40 20 55 10 80 8 90 7 100

Assume that the rental price of capital is $5 and the wage rate of labor is $4. Determine the minimum cost of producing 2,800 units of output and then show how the combination of inputs that yield the minimum cost can be determined using the marginal approach. 4. During the last few days the Superior Company has been running into problems with its computer system. The last run of the production cost schedule resulted in the incomplete listing shown below. From your knowledge of cost theory, fill in the blanks. Q 0 1 2 3 4 5 6 7 8 9 10 TC 40 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ TFC _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ TVC _____ _____ 20 _____ _____ 40 _____ _____ 96 _____ _____ ATC x 52 _____ 21.33 _____ _____ 15.67 _____ _____ _____ _____ AFC x _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ AVC x _____ _____ _____ _____ _____ _____ 10 _____ 15 _____ MC x _____ _____ _____ 4 _____ _____ _____ _____ _____ 45