1.

Find L
Q=15KL
18750=15KL
This Means
KL=1250
L=1250/K

K=18L/25
K=18 * (1250/25K)
K^2=900
K=30 → Now sub this into equation L

L= 1250/30
L=42

b)
Since the price of labour increases to $20 per unit, the output per unit at an optimal level
will be as follows

K/L = -20/25
K=20L/25

18750=15KL

KL=1250
L=1250/K

K=20 * (1250/25K)

K^2 = 1000
K=32

L= 1250/32
L=39
Therefore, when the price of labour increases, the optimal level of labour
decreases.

c)
No, this plant is not subject to decreasing returns to scale. This is because when the
inputs double, the output more than doubles.

Q=15KL
 If K=1

Q=15*1*1
Q=15

If K=2

Q= 15 * 2 * 2
Q=60

2.)

a).

MPs= 350-0.24S
If S=414
MPs= 350-0.24(414) → MPs=250.6

MPu=220-0.6U
If U=320.08
MPu=220-0.6(320.08) → MPu=28

Cost is minimized when MPs/Ps = MPu/Pu

250.6/20 = 28/4
12.5 = 7 → Since they do not equal, this means the cost is not being minimized.
This recommendation is not correct because the output of hours is not optimal for
the company’s economic well-being.

b).

For cost minimization: MPs/Ps = MPu/Pu

350-0.24S/20 = 220-0.6U/4 → Multiply the right side by 5 to get rid of the fraction.

350-0.24S = 1100-3U

0.24S= 3U-750
 S=12.5U-3125

Sub in TC

TC= 4U + 20 (12.5U-3125)
20350= 4U +250U-62500
82850=254U
U=326.2

S=12.5(326.2)-3125
S=952.3

Therefore, it should hire 326 hours of unskilled labour and 952 hours of skilled labour.

c.)
Optimal hiring for unskilled labour is MPu*(Price)

10*(220-0.6U)= 4
*(220-0.6U)=4/10
220-0.6U=4/10
219.6=0.6U
U=366 → Therefore, the company should hire 366 hours for unskilled labour.
3.

c.)
We can't be sure that the perfect combination of output comes only from this cost curve.
The cost curve shows a specific cost level but doesn't show how inputs and the desired
output trade off against each other. To find the best output mix, we need to compare how
easily we can switch between inputs (MRTS) with how much the products cost.
4.)

a).

P=$90

TC=1380+30Q+5Q^2
MC=30+10Q

30+10Q=90
Q=6 → Therefore, at an output of 6, profit is maximized.

b).
Profit is total revenue minus total cost

TC when Q=6 → = 1380 + 180 + 180 = 1740

TR = 90(6)
= 540

TR-TC = 540-1740
=-1200

Therefore, the firm's economic profit is -$1200. The firm needs to gain money.

c).

Average cost= TC/Q

1740/6=290

Therefore, the firm's average cost at this output is $290.

d).
No, if the other firms in the industry have the same cost function, the industry would not
be in equilibrium because they are all losing money. Equilibrium industries must have no
incentive for firms to enter or exit. This is usually done by achieving a cost structure in
which profit is consistently earned.
5.

a.)
To solve for short-run equilibrium output → Qd=Qs

→ 3252-40P=212+120P

3252-212=120P+40P
3040=160P
P=19

Q=3252-40(19)
Q=2492

Therefore, the short-run equilibrium output of binders is P=19 and Q=2492

b.)
To calculate, long-run profit maximizing out of the firm, this means ATC will be at
its minimum. → ATC=TC/q

ATC=TC/Q

=(1+2q+0.0625q^2)/q
=(1/q)+(2q/q)+(0.0625q^2/q)
=(1/q) + 2 + 0.0625q

dATC/dq= (-1/Q^2)+0.0625

1/q^2=0.0625
q=4 → Therefore, the long-run, profit-maximizing output level for this firm is 4.

c.) Long run equilibrium price→ sub in Q into TC

=(1/Q) + 2 + 0.0625

= (1/4 ) + 2 + 0.0625(4)

=2.5 → Therefore, the long-run equilibrium price charged in the market for binders
is $2.5
d.) Use the Qd equation and sub in P

Qd=3252-40P

Qd= 3252-40(2.5)
Q=3152→ Therefore, the long-run equilibrium output of the binder industry is
3152.

e.) # of firms = 3152/4 → = 788 → Therefore, there will be approximately 788 firms
in the long-run equilibrium.

6.

a.) Profit maximizing output MR=MC

P=40-4Q

TR=P*Q
=40-4Q(Q)
=40Q-4Q^2

MR = dTR/dQ
=40-8Q

TC=80+4Q=0.5Q^Q
MC=4+Q

MR=MC
40-8Q=4+Q
Q=4 → Therefore, the equilibrium output when firm A acts as a monopolist is Q=4.
b.)

Refer to this drawing to calculate consumer surplus and producer surplus.

Consumer surplus = Area of ABC

=4(16)/2
=$32. Therefore, the consumer surplus is $32

Producer Surplus =Areas of DECB

= [4(4)/2] + 4(16) → *One triangle and one rectangle

=$72 Therefore, consumer surplus is $72

c.)
If price and output are perfectly competitive, this means MC=P

4+Q=40-4Q
-36=-5Q
Q=7.2

P=40-4(7.2)
P=11.2 → Therefore, the equilibrium output is 7.2 and the equilibrium price is
$11.2.
d.)

Refer to this graph when calculating consumer surplus and producer surplus

Consumer surplus = Area of ABE

= 28.8(7.2)/2
=103.68

Producer Surplus
=7.2(7.2)/2
=$7.2

Therefore, the consumer surplus is $103.68 and the producer surplus is $7.2.

e.)

When it is a monopoly

Consumer surplus + Producer surplus = 32+72 = $104

When it is in perfect competition

Consumer surplus + Producer surplus = 104.68 +7.2 = 110.88

 Change in social welfare = 110.88-104 = $6.88.

Therefore the the increase when the market moves from a monopoly to perfect
competition is $6.88

7.

a.)

Since AC=4+4Q & AC=TC/Q, we can rearrange the equation so it appears as

follows.

TC=Q(AC)
TC=23Q+6Q^2 Therefore, this is the equation for the firm's short-run total cost
function.

b.)
We can determine if there are fixed costs when the quantity is 0, TC>1.

Since TC=0 when Q=0, there are no fixed costs.

c.)

Price of product = $23. Profit function=R-TC

First we need Revenue

R=P(Q)
R=23Q

Profit
=23Q-23Q-6Q^2
=-6Q^2
Since the value is negative, this means the firm is making a loss.

d.)

To find MC, derive TC

TC= 23Q+6Q^2
MC= 23+12Q