Managerial Economics (MGE2) Sec E, F, G, H Home Work 2 Total 50 Marks Instructions: 1. Print the assignment on A4 paper (double side). If printed on one side, contents on the back of paper will not be evaluated. Answers to Part I to be provided only in the space provided. Answers to Part II to be provided by encircling the correct choice. 2. 3. 4. The writing must be comprehendible – anything that is not legible will be ignored and hence penalized. 5. Due date is Sunday May 11, 11:59 pm 6. Mode of submission is hard copy only. A drop box will be available outside AC2 CTY Level, Academic Associates’ office. 7. Soft copy submission will NOT BE accepted. 8. Assignments after due date and time will NOT BE accepted. 9. Honor code 3 is applicable. This is a group assignment. Mention your group ID, group members’ names and IDs below. Group ID: Name of Group Member PGID If the firm was to undertake production then what is the optimal quantity it would produce and the price it will charge. Derive the short run marginal cost (SRMC) b. ii. Show that optimal price you derived is less than SRAC. i. e. Based on (e) (i). Derive the profits of the firm. Derive the long run marginal cost d. i. Now suppose the firm is endowed with 25 units of capital K a. Derive the optimal price and quantity that a firm should produce if it were to undertake production in the short run II.5 where K is the capital and L is the labor required to produce Q quantities of good. If the firm did not produce anything and sold off its entire capital endowment at 5 per unit. should the firm produce any quantity in the long run? . Derive the short run average cost (SRAC) iii. Let’s say the cost of labor is 5 per unit of labor and the cost of capital is 5 per unit of capital. If the firm has more capital than it needs then what should it do? iv. i. Derive the long run average cost iii. Derive the short run total cost (SRTC) ii. then how much would the firm earn? ii. Should the firm produce in the short run? c. I. firm faces demand curve P= 20 –Q. What is the firm’s capital requirement? iii. Derive the long run total cost ii. The firm faces a demand curve for its product such that P=20 Q. This implies that if it has more capital than it needs then it can sell extra capital in the free market at the market rate which is 5 per unit. i.Part I Question 1 (20 Points): Consider a firm which has a production function such that Q = 2[KL] 0. As in part (b). In the long run the firm can vary its entire input requirement. Solution 1: . . . . Now suppose the golf club cannot price discriminate then i. The cost to the firm per unit of the game equal to 12 a. Suppose the golf club can price discriminate between rich and poor then i. (b). What is price it will charge rich customers vs poor customers. What are the profits of the firm? d. . Calculate the profits of the firm. What entry fee and the user fee will it charge to its clients to maximize profits? ii. rich and the poor. Now suppose the firm can set entry fee and charge a user fee per game i. where Gp is the number of games you play and Pp is the price poor are willing to pay for it. (c). Rich have a demand curve for golf which is Pr= 120 Gr. Similarly the poor have a demand which is Pp= 60 – Gp. what will be your advice to the golf club. c. Based on (a). b.Question 2 (20 Points): Consider a golf club that could potentially cater to two types of clients. What is the optimal price it will charge? ii. ii. Calculate the profits of the golf club. where Gr is the number of games you play and Pr is the price you are willing to pay for it. . . . . If there is only one variable input. When average variable cost is at its minimum: a) average total cost is increasing with increases in output b) average variable cost plus average fixed cost is increasing with increases in output c) average total cost is equal to average variable cost d) marginal cost is less than average total cost e) marginal cost is greater than average total cost 5. The long-run average cost curve slopes upward if there are: . average variable cost can be defined as the: a) output’s price divided by the input’s average product b) output’s price divided by the input’s marginal product c) price of the variable input divided by its average product d) price of the variable input divided by its marginal product e) price of the variable input multiplied by its marginal product 3. An example of implicit costs is the a) bad-debt liabilities arising out of excessive sales on credit b) wages paid to the owners’ children c) opportunity cost of owner-supplied capital and labor that is not recognized by accountants d) prices paid for purchased inputs e) the alternative uses for money that could be borrowed 2. When average total cost is at its minimum: a) average variable cost is declining with increases in output b) average variable cost plus average fixed cost is declining with increases in output c) average total cost is equal to average variable cost d) marginal cost is equal to average variable cost e) marginal cost is equal to average total cost 4. The long run is a time period during which: a) all inputs are semi variable b) all inputs except capital and entrepreneurship are variable c) average variable costs are strictly less than average total cost d) all inputs are quasi-variable e) all inputs are variable 6.Part II: Circle the correct Choice (10 Points) 1. 5X . The Wilson Corporation produces output according to Q = 4(KL) . If capital costs $2 per unit and labor costs $8 per unit.575 d) $18.075 3 2 8.24X + 144X. Pace’s total cost of producing CO2 cartridges is given by TC = 0. $18. where K is the amount of capital used and L is the amount of labor employed. Economies of scope exist when it is cheaper to produce: a) with a large fixed plant and equipment b) at increasing rates of output c) given quantities of two different products together than to produce the same quantities separately d) given quantities of two different products separately than to produce the same quantities together e) using more than one technique 1/2 10.050 c) c. Leisure Enterprise’s total cost of producing speedboats is given by TC = 10Q − 4Q2 + 25Q + 500. Wilson’s minimized long-run average total cost is: a) $2 b) $2Q c) $10 d) $10Q e) $22 .a) b) c) d) e) some factors without diminishing marginal returns diseconomies of scope in the management of multi plant operations economies of scale diseconomies of scale no factors without diminishing marginal returns 3 7. the marginal cost of producing the 25th speedboat is: a) $1. On the basis of this information. $6. The level of output that minimizes average total cost is: a) 12 cartridges b) 10 cartridges c) 18 cartridges d) 20 cartridges e) 24 cartridges 9.775 e) $19.700 b) b.