Finance and Economics

1. Draw a production function that exhibits diminishing marginal product and compare with the case of constant marginal product. Explain.
2. Suppose that a small family farm sold its output for $100,000 in a given year. The family spent $25,000 on fuel, $40,000 on seed, fertilizer, and pesticides, and $25,000 on equipment, including maintenance. The family members could have earned $20,000 working at other occupations.What is the accounting profit for the family farm? What is the economic profit for the family farm?
Labor
Output
Marginal Product
Variable Cost
Fixed Cost


—
$0
$5
1
100
100
$5
$5
2
250
$10
$5
3
350
$15
$5
4
50
$20
$5
5
25
$25
$5
6
430
$30
$5
3. What is the marginal product of the second worker?
4. What is the total output of five workers?
5. What is the average total cost of producing 425 units of output?
Exercise 7
The figure below depicts average total cost functions for a firm that produces automobiles.
6. Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory?
7. Which curve represents the long-run average total cost?
8. In the long run, the firm can operate on which of the following average total cost curves?
a. ATCA
b. ATCB
c. ATCC
d. All of the above are correct.
9. The firm experiences economies of scale at which output levels?
a. output levels less than M
b. output levels between M and N
c. output levels greater than N
d. All of the above are correct as long as the firm is operating in the long run.
10. At levels of output less than M, the firm experiences
a. economies of scale.
b. diseconomies of scale.
c. constant returns to scale.
d. both diminishing marginal productivity and coordination problems.
Table 1
Bill’s Birdhouses
COSTS
REVENUES
Quantity Produced
Total Cost
Marginal Cost
Quantity Demanded
Price
Total Revenue
Marginal Revenue

$0
—

$80
—
1
$50
1
$80
2
$102
2
$80
3
$157
3
$80
4
$217
4
$80
5
$285
5
$80
6
$365
6
$80
7
$462
7
$80
8
$582
8
$80
1. Refer to Table 1. What is the marginal cost of the 8th unit?
2. Refer to Table 1. What is the marginal revenue from selling the 5th unit?
3. Refer to Table 1. At what quantity does Bill maximize profits?
4. Refer to Table 1. What is Bill’s economic profit at the profit-maximizing output level?
5. Refer to Figure 1. Let Q represent the optimal quantity of output. Then what is the marginal revenue at Q = 270 and Q = 322, respectively?
6. Refer to Figure 1. When the price of the good is $175, what is the firm’s maximum profit?
7. Refer to Figure 1. What is the maximum price below which the firm will shut down in the short run?
8. Refer to Figure 14-7. What is the maximum price below which the firm will leave the market in the long run?
9. Refer to Figure 1. Suppose ATC =110, 100, 125, when output is 270, 322, 515, respectively. Is the firm experiencing an economic loss or profit when the price is 80? Compute the loss or profit.
10. Identify the area carefully on the graph above that represents the loss or profit of the firm