A firm’s product sells for $4 per unit in a highly competitive market.

The firm
produces output using capital (which it rents at $25 per hour) and labor (which is
paid a wage of $30 per hour under a contract for 20 hours of labor services).
Complete the following table and use that information to answer the questions that
follow.

K L Q MPK APK APL VMPK

0 20 0
1 20 50
2 20 150
3 20 300
4 20 400
5 20 450
6 20 475
7 20 475
8 20 450
9 20 400
10 20 300
11 20 150

a. Identify the fixed and variable inputs.

b. What are the firm’s fixed cost?

c. What is the variable cost of producing 475 units of output?

d. How many units of the variables input should be used to maximize profits?

e. What are the maximum profits this firm can earn?

f. Over what range of the variable input usage do increasing marginal returns exist?

g. Over what range of the variable input usage do decreasing marginal returns exist?

h. Over what range of input usage do negative marginal returns exist?

d.How many units of the variable input should be used to maximize profits?

Six units of the variable input should be used to maximize profits.

VMPK > $25

Thus six units of the variable input should be used to maximize profit.

e.What are the maximum profits this firm can earn? SHOW WORK

Sale of 6 units= $4×475 = $1900.

Fixed cost = $30×20 = $600.

Variable cost of 6 units= $ 25×6= $150.

Thus the maximum profits this firm can earn is $1900 - $600- $150 = $1,150.

f.Over what range of the variable input usage do increasing marginal

returns exist?

A graph may also be useful

When the capital (K) is between 0 and 3.

g.Over what range of the variable input usage do decreasing marginal returns exist?

When the capital (K) is greater than 3.

h.Over what range of input usage do negative marginal returns exist?

When the capital (K) is greater than 7

An economist estimated that the cost function of a firm is:

C(Q) = 100 + 20Q + 15Q2 + 10Q3

And, MC(Q) = 20 + 30Q + 30Q2

Based on this information, determine:

1) The fixed cost of producing 10 units of output

2) The variable cost of producing 10 units of output

3) The total cost of producing 10 units of output

4) The average fixed cost of producing 10 units of output

5) The average variable cost of producing 10 units of output

6) The average total cost of producing 10 units of output

7) The marginal cost when Q = 10

1) The fixed cost of producing 10 units of output - 100

2) The variable cost of producing 10 units of output

20Q + 15Q2 + 10Q3 = 20(10) + 15(100) + 10(1000) = 11700

3) The total cost of producing 10 units of output

100 + 20Q + 15Q2 + 10Q3 = 100 + 20(10) + 15(100) + 10(1000) = 11800

4) The average fixed cost of producing 10 units of output

Total fixed cost/no. of units = 100/10 = 10

5) The average variable cost of producing 10 units of output

Total variable cost/no. of units = 11700/10 = 1170

6) The average total cost of producing 10 units of output

Total cost/no. of units = 11800/10 = 1180

7) The marginal cost when Q = 10

20 + 30Q + 30Q2 = 20 + 30(10)+30(100) = 3320

The Blair Company's three assembly plants are located in California, Georgia and
New Jersey. Previously, the company purchased a major subassembly, which
becomes part of the final product, from an outside firm. Blair has decided to
manufacturer the subassemblies within the company and must now consider
whether to rent one centrally located facility or to rent three separate facilities, each
located near one of the assembly plants, where each facility would manufacturer
only the subassemblies needed for the nearby assembly plant. A single, centrally
located facility, with a production capacity of 18,000 units per year, would have fixed
costs of $900,000 per year and a variable cost of $250 per unit, Three separate
decentralized facilities, with production capacities of 8,000, 6,000 and 4,000 units per
year would have fixed costs of $475,000, $425,000, and $400,000, respectively and
variable costs per unit of only $225 per unit, owing primarily to the reduction in
shipping costs. The current production rates at the three assembly plants are 6,000,
4,500 and 3,000 units respectively.

a. Assuming that the current production rates are maintained at the three assembly
plants, which alternative should management select? Justify your answers.

b. If demand for the final product were to increase to production capacity, which
alternative would be more attractive? Why?

c. What additional information would be useful before making a decision? Discuss.

Single: Q = 18,000 units per year, FC = $900,000 per year, AVC = $250 per unit.
Three separate: Q1 = 8,000, Q2 = 6,000 and Q3 = 4,000 units per year, FC1 =
$475,000, FC2 = $425,000 and FC3 = $400,000, AVC = $225 per unit.
The current production rates at the three assembly plants are 6,000, 4,500 and 3,000
units, respectively.
a. Assuming that the current production rates are maintained at the three assembly
plants:
single plant will have total costs TC = FC + AVC*Q = 900,000 +
250*(6,000+4,500+3,000) = $4,275,000.
three plants will have total costs TC = (475,000+225*6000) + (425,000+225*4500) +
(400,000+225*3000) = $4,337,500
So, management should select the first alternative.
b. If demand for the final product were to increase to production capacity,
single plant will have total costs TC = FC + AVC*Q = 900,000 + 250*18,000 =
$5,400,000.
three plants will have total costs TC = (475,000+225*8000) + (425,000+225*6000) +
(400,000+225*4000) = $5,350,000
So, in this case the second alternative would be more attractive.