Daniel Job M. Vallejos Ms.

Cherry Madriaga
C36 March 17, 2023
COBMECO
Problem Set 4
1. 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.
Table 1:
Quantity Price per Unit
Capital (K) Labor (L) (Q) (P) MPK APK APK VMPK
Given Given Given Given ( ∆Q / ∆K ) (Q/K) (Q/L) ( MPK * P )
0 20 0 4 0 0 0 0
1 20 50 4 50 50 3 200
2 20 150 4 100 75 8 400
3 20 300 4 150 100 15 600
4 20 400 4 100 100 20 400
5 20 450 4 50 90 23 200
6 20 475 4 25 79 24 100
7 20 475 4 0 68 24 0
8 20 450 4 -25 56 23 -100
9 20 400 4 -50 44 20 -200
10 20 300 4 -100 30 15 -400
11 20 150 4 -150 14 8 -600

Table 2:
Capital Labor Quantity Price per Total Fixed Cost Variable Total Cost
Profit
(K) (L) (Q) Unit (P) Revenue (TR) (FC) Cost (VC) (TC)
Given Given Given Given (Q * P) ($30 * (L)) ($25 * (K)) (FC + VC) (TR - TC)
0 20 0 4 0 600 0 600 -600
1 20 50 4 200 600 25 625 -425
2 20 150 4 600 600 50 650 -50
3 20 300 4 1200 600 75 675 525
4 20 400 4 1600 600 100 700 900
5 20 450 4 1800 600 125 725 1075
6 20 475 4 1900 600 150 750 1150
7 20 475 4 1900 600 175 775 1125
8 20 450 4 1800 600 200 800 1000
9 20 400 4 1600 600 225 825 775
10 20 300 4 1200 600 250 850 350
11 20 150 4 600 600 275 875 -275
 a) Among the variables, what is the fixed input and variable input?
In the given data, the fixed input is the Labor while the variable input is the Capital. The Labor is the
fixed input among the variables given as it consists of constant value of 20. Additionally, the manager
could not adjust its value as it is a fixed input. Meanwhile, the Capital is the variable input as it
changes such as 0 up to 11. It is also a variable input since it is the input a manager could adjust in
order to alter the production.
b) What are the firm’s fixed costs?
In order to determine the firm’s fixed cost, the payment for Labor ($30) and the number of labor
hours (20 hours) are used. In this situation, the payment for Labor is multiplied to the number of
labor hours (20 hours) which will amount to $600 fixed costs (30 * 20.

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

Based from the completed table, Capital 6 and 7 has produced 475 units of output from the rest. The
Variable Cost of Capital 6 resulted to $150, while Capital 7 has $175.

d) How many units of the variable input should be used to maximize profits?
Despite of Capital 7 and 6 producing 475 units of output, Capital of 6 is better in order to maximize
the profit of the firm. Capital 7 has a MPk value of 0, meaning that there are no additional profit earned
for producing an added unit. Meanwhile, Capital of 6 has an MPk value of 25.

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

Based on table 2, it is seen that the maximum profit that the firm can earn is $1150 from the Capital
of 6. Despite of Capital 6 and 7 has both amount of $1900 as their Total Revenue (TR), Capital 7
accumulated more Total Cost (TC) than Capital 6, resulting to a lesser amount of $1125 Profit.

f) Over what range of the variable input usage do increasing marginal returns exist?
Based on Table 1, variables 1 until 3 has a visible increase in marginal returns. Capital 1 has an
amount of 50, Capital 2 with an amount of 100, and Capital 3 of 150.

g) Over what range of the variable input usage do decreasing marginal returns exist?
Moreover, variables 4 up to 7 has decreasing marginal returns. Capital 4 started to decrease from
3 with an amount of 100, followed by 50 by Capital 5. Capital 6 has an amount of 25, while Capital 7
dropped to a value of 0.

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

Lastly, it is observable that variables 8 to 11 accumulated negative marginal returns. Capital of 8
has a value of -25, while Capital 9 of -50. Also, Capital of 10 and 11 accumulated values of -100 and
-150 respectively.

2. An economist estimated that the cost function of a single-product firm is

𝐶(𝑄) = 90 + 35𝑄 + 25𝑄2 + 10𝑄3

Based on this information, determine:

a) The fixed cost of producing 10 units of output.

Since the value of fixed cost is equivalent to f from the formula 𝐶(𝑄) = 𝑓 + 𝑎𝑄 + 𝑏𝑄2 + 𝑐𝑄3 ,
therefore the value of the fixed cost of producing 10 units of output is still 90.

b) The variable cost of producing 10 units of output.

By substituting 10 to the Q of the equation, the variable cost of the single-product firm will be 12,850.

c) The total cost of producing 10 units of output.

In order to compute for the Total Cost, we will be adding the variable cost and the fixed cost of the
firm. It will result with an amount of 12,490.
d) The average fixed cost of producing 10 units of output.

To average the fixed cost, Fixed cost is divided to the 10 units of output. With that, the average fixed
cost of the firm producing 10 units of output is 9.

e) The average variable cost of producing 10 units of output.

To average the variable cost, Variable cost is divided to the 10 units of output. With that, the average
variable cost of the firm producing 10 units of output is 1,285.

f) The average total cost of producing 10 units of output.

In order to find the Average Total Cost of the firm, it is needed to add both Average Fixed Cost and
the Average Variable Cost. The Average Total Cost of the firm will result 1,294.

g) The marginal cost when Q = 10.

 Substituting 10 to the Q and of the given equation, the marginal cost will amount to 3,535.

3. The following graph summarizes the demand and costs for a firm that operates in a perfectly competitive
market.

a) What level of output should this firm produce in the short run?
The level of output that the firm should produce in the short run is at the quantity of 7. The reason for
this is that the intersection of the Marginal Revenue (MR) and the Marginal Cost (MC) curve
determines the firm’s level of output to be produced.

b) What price should this firm charge in the short run?

The price that the firm should charge in the short run is $28 since the Marginal Revenue (MR) is equal
to the Price.

c) What is the firm’s total cost at this level of output?

 In order to identify the firm’s total cost, Average Total Cost (ATC) curve will be used to measure the
total cost. For the computation, the formula for ATC will be used since the quantity and ATC is already
𝐶(𝑄)
given. By adjusting the formula from 𝐴𝑇𝐶 = to 𝐶(𝑄) = 𝐴𝑇𝐶 ∗ 𝑄, Total cost can now be
𝑄
calculated. The ATC is set at 32 and the quantity of output is set at 7, multiplying both values will
amount to a total cost of $224.

d) What is the firm’s total variable cost at this level of output?

In order to identify the firm’s total variable cost, the Average Variable Cost (AVC) curve will be used
𝑉𝐶(𝑄)
to measure. Using the formula 𝐴𝑉𝐶 = , rearranging it to 𝑉𝐶(𝑄) = 𝐴𝑉𝐶 ∗ 𝑄 will help in
𝑄
identifying the value of the total variable cost. Multiplying 14 (AVC) to 7(The quantity) will result to
a total variable cost of $98.
e) What is the firm’s fixed cost at this level of output?

In order to identify the firm’s total fixed cost at this level of output, the Average Fixed Cost (AVC)
𝐹𝐶
curve will be used to measure. Using the formula 𝐴𝐹𝐶 = , rearranging it to 𝐹𝐶 = 𝐴𝐹𝐶 ∗ 𝑄 will
𝑄
 help in identifying the value of the total fixed cost. Multiplying 18 (AFC) to 7 (The quantity) will
result to a total fixed cost of $126.

f) What is the firm’s profit if it produces this level of output?

Using the formula of price “𝜋 = 𝑃𝑄 − 𝐶(𝑄), it is observable that the price is lower than the average
total cost of the firm. In the end, the firm’s profit will have a $28 loss from 7 units of output.

g) What is the firm’s profit if it shuts down?

As the firm shuts down its production, the firm will have a profit of -$126. When a firm shuts down,
the loss of the firm will equate with the fixed cost of the firm, which is $126. Since it will be shutting
down, it will result with an amount of -$126.

h) In the long run, should this firm continue to operate or shut down?

With that amount of price the firm charges, the firm should shut down in the long run. In the graph,
the minimum Average Total Cost point is $32, which is more than the price of $28. With the rule that
firm should enter or continue if their Price is greater than the value of Average Total Cost ( P > ATC),
the firm should exit as its price is lower than the Average Total Cost. ($28 < $32)

4. You are the manager of a monopoly, and your analysts have estimated your demand and costs functions as
𝑃 = 200 − 2𝑄 and 𝐶(𝑄) = 2,000 + 3𝑄2 , respectively.

a) What price–quantity combination maximizes your firm’s profits?

 The price-quantity that would maximize the profit of the firm is Price of $160 and 20 units for
quantity. The MR resulted with 200 – 4Q. Marginal Cost was found using the total cost of the firm
and the equation for Marginal Cost 𝑀𝐶(𝑄) = 𝑎 + 2𝑏𝑄 + 3𝑐𝑄2 . With the rule that the Marginal
Revenue is equal to Marginal Cost, the value of quantity was found with the value of 20 units. With
that, substituting the value of quantity (Q=20) to the equation of price, the amount of price will result
to an amount of $160.

b) Calculate the maximum profits.

In computing the profit, the Total Cost is subtracted from the Total Revenue which resulted to an
amount of $0. With that, we could say that the firm did not generate any profit as the Total Revenue
is balanced with the Total Cost.

c) Is demand elastic, inelastic, or unit elastic at the profit-maximizing price–quantity combination?

 1+𝐸
Through the use of the formula “𝑀𝑅 = 𝑃 [ ], we can conclude that the demand is elastic with an
𝐸
absolute value of -4, or simply 4.

d) What price–quantity combination maximizes revenue?

The price-quantity that would maximize the revenue of the firm is Price of $10 and 50 units for
quantity. Using the equation 𝑀𝑅 = 200 − 4𝑄, the quantity here resulted to 50. After solving for the
quantity, the Price has an equation of 𝑃 = 200 − 2(𝑄). By substituting the value of Q to the equation,
the profit will amount to 100.

e) Calculate the maximum revenues.

 In order to compute for the Total revenue of the firm, the quantity (Q) will be multiplied by the profit
(P). With 50 units as the quantity and 100 as the profit of the firm, the maximum revenue of the firm
amounted to 5,000.

f) Is demand elastic, inelastic, or unit elastic at the revenue-maximizing price–quantity

combination?

1+𝐸
Through the use of the formula “𝑀𝑅 = 𝑃 [ ], we can conclude that the demand is unitary elastic
𝐸
with an absolute value of -1, or simply 1.