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    ECO101: Introduction To Economics (Summer Semester, 2019) Tutorial Problem Set - 04

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    Shubham Kumar
    This document contains a tutorial problem set for an economics course. It includes 12 questions related to concepts like sunk costs, production functions, cost curves, profit maximization, and supply curves. Some key details are: - Question 2 asks about accounting costs, economic costs, and whether a grocery store owner should shut down based on revenues, costs, and alternative opportunities. - Question 3 involves calculating short-run total, average, and marginal costs given a production function and input prices. - Question 8 asks about profit maximization for a watch making firm with total cost and marginal cost functions. - Question 11 involves sketching marginal cost, average cost, and average variable cost curves based on a short-run cost function

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    ECO101: Introduction To Economics (Summer Semester, 2019) Tutorial Problem Set - 04

    Uploaded by

    Shubham Kumar
    31 views3 pages
    This document contains a tutorial problem set for an economics course. It includes 12 questions related to concepts like sunk costs, production functions, cost curves, profit maximization, and supply curves. Some key details are: - Question 2 asks about accounting costs, economic costs, and whether a grocery store owner should shut down based on revenues, costs, and alternative opportunities. - Question 3 involves calculating short-run total, average, and marginal costs given a production function and input prices. - Question 8 asks about profit maximization for a watch making firm with total cost and marginal cost functions. - Question 11 involves sketching marginal cost, average cost, and average variable cost curves based on a short-run cost function

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    This document contains a tutorial problem set for an economics course. It includes 12 questions related to concepts like sunk costs, production functions, cost curves, profit maximization, and supply curves. Some key details are: - Question 2 asks about accounting costs, economic costs, and whether a grocery store owner should shut down based on revenues, costs, and alternative opportunities. - Question 3 involves calculating short-run total, average, and marginal costs given a production function and input prices. - Question 8 asks about profit maximization for a watch making firm with total cost and marginal cost functions. - Question 11 involves sketching marginal cost, average cost, and average variable cost curves based on a short-run cost function

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    31 views3 pages

    ECO101: Introduction To Economics (Summer Semester, 2019) Tutorial Problem Set - 04

    Uploaded by

    Shubham Kumar
    This document contains a tutorial problem set for an economics course. It includes 12 questions related to concepts like sunk costs, production functions, cost curves, profit maximization, and supply curves. Some key details are: - Question 2 asks about accounting costs, economic costs, and whether a grocery store owner should shut down based on revenues, costs, and alternative opportunities. - Question 3 involves calculating short-run total, average, and marginal costs given a production function and input prices. - Question 8 asks about profit maximization for a watch making firm with total cost and marginal cost functions. - Question 11 involves sketching marginal cost, average cost, and average variable cost curves based on a short-run cost function

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    ECO101: Introduction to Economics (Summer Semester, 2019)

    Tutorial Problem Set – 04

    1. What is an example of sunk costs for someone opening a law practice?


    (a) The cost of office supplies (b) Wages for paralegals
    (b) Rent on office space (d) The cost of a law school education

    2. A grocery shop is owned by Mr. Moore and has the following statement of revenues
    and costs:
    Revenue $250000
    Supplies $25000
    Electricity $6000
    Employee salaries $75000
    Mr. Moore’s salary $80000
    Mr. Moore always has the option of closing down his shop and renting out the land
    for $100000. Also, Mr. Moore himself has job offers at a local supermarket at a salary
    of $95999 and at a nearby restaurant at $65000. He can only work one job though.
    What are the shop’s accounting costs? What are Mr. Moore’s economic costs? Should
    Mr. Moore shut down his shop?

    3. Suppose a firm’s production function is given by f(L,K) = min{0.5L, K}. Assume that
    the per unit price of labour (L) is w and the per unit price of capital (K) is r.
    (a) Find STC, SAC, SFC and SMC when w=12, r=3 and K=4.
    (b The quantity at which the SAC is minimized and also minimum value of SAC.

    4. Assume the variable cost function is VC(q) = 9q2. In addition to variable costs, there
    are fixed costs of operation of FC = $36.
    (a) What are the total cost, marginal cost and the average total cost?
    (b) What is the minimum efficient scale?

    5. Consider the given production function Q = L0.75K0.25. Find elasticity of substitution.

    6. Consider the production function F(L,K) = L0.25K0.25. Find the associated (long run)
    total, average and marginal cost curves and sketch them.
    7. Consider a water heater manufacturing company. The number of water heaters
    manufactured per day, q, is a function of the number of workers per day, L, and the
    number of square feet of sheet metal per day, S. Specifically, the company’s (general)
    CES production function is
    Q = (L-2 + S-2/40)-0.5
    The hourly wage rate is $20 and the price per square foot of steel metal is $0.50.
    (a) Find the marginal product of labor (workers) and capital (metal sheet).
    (b) Derive the long run cost function and the long run expansion path.

    8. Suppose you are the manager of a watch making firm operating in a competitive
    market. Your cost of production is given by C = 200 + 2q2, where q is the level of
    output and C is total cost. (The marginal cost of production is 4q; the fixed cost is
    $200.)
    (a) If the price of watches is $100, how many watches should you produce to
    maximize profit?
    (b) What will the profit level be?
    (c) At what minimum price will the firm produce a positive output?

    9. Suppose that a competitive firm’s marginal cost of producing output q is given by


    MC(q) = 3 + 2q. Assume that the market price of the firm’s product is $9.
    (a) What level of output will the firm produce?
    (b) What is the firm’s producer surplus?
    (c) Suppose that the average variable cost of the firm is given by AVC(q) = 3 + q.
    Suppose that the firm’s fixed costs are known to be $3. Will the firm be
    earning a positive, negative, or zero profit in the short run?
    10. Suppose the same firm’s cost function is C(q) = 4q2 + 16.
    (a) Find variable cost, fixed cost, average cost, average variable cost, and average
    fixed cost.
    (b) Show the average cost, marginal cost, and average variable cost curves on a
    graph.
    (c) Find the output that minimizes average cost.
    (d) At what range of prices will the firm produce a positive output and earns
    negative profit and positive profit?
    11. A competitive firm has the following short-run cost func :C(q)= q3 − 8q2+30q+ 5.
    (a) Find MC, AC, and AVC and sketch them on a graph.
    (b) At what range of prices will the firm supply zero output?
    (c) Identify the firm’s supply curve on your graph.
    (d) At what price would the firm supply exactly 6 units of output?

    12. Suppose that a firm’s production function is q = 9m1/2 in the short run, where there are
    fixed costs of $1000, and m is the variable input whose cost is $4000 per unit.
    (a) What is the total cost of producing a level of output q? In other words, identify
    the total cost function C(q).
    (b) Write down the equation for the supply curve.

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