Economics 2302 Principles of Microeconomics Professor McFa University of Texas at Dallas Problem Set 4 INote: Problem sé in this class will not be collected or graded] 1, Suppose you are the manager of a fast-food restaurant. Your capital choices are fixed in the short run, but you can vary the # of workers you use each day. The following table summarizes your production possibilities: meals per day day ° ° 1 30 2 70 3 100 4 120 5 130 6 135 7 140 8 140 4, Calculate the average product of labor and the marginal product of labor for each level of labor input, Graph your answer and explain why the two curves, MPL and APL, rise and fall as you have drawn. ', Suppose that the current wage rate for restaurant employces is $40 per day and that the rental of the restaurant building and property amounts to $60 per day. Compute the total variable ‘cost, marginal cost, average variable cost, total fixed cost, average fixed cost, total cast, and average (Lotal) cost for each line of the above table. ¢. Ona new graph, graph the MC, AC, and AVC curves for your firm. Explain why the curves are shaped as they are. How do the MC, AC, and AVC curves relate to the MPL and APL, ‘Once again, you are the manager of a fast-food restaurant, and you must choose an output level in this competitive industry. (See above table.) As before, your capital choices are fixed in the short run, but you can vary the number of workers you use each day. Also, the current wage rate for restaurant employees is $40 per day and the rental of the restaurant building and property amounts to $60 per day. a, Suppose the current prive per meal is $2. How many meals will you want to serve? Compute your profits (Losses) at this level of output. How many workers will you hire at this output price? How docs the wage rate compare to the extra revenue generated by that last worker hired? b. Suppose the current price per meal is $1.30. How many meals will you want to serve? What are your profits?© Suppose the current price per meal is $1.00. How many meals will you want to serve? ‘What are your profits? A firm hires 2 workers and rents 15 acres of land for a season. It produces 150,000 bushels of | crop. If it had doubled its land and labor, produetion would have been 325,000 bushels. Does the firm face constant, decreasing, or increasing returns to scale? You have an opportunity to buy an apple orchard that produces $25,000/year in total revenue. To run the orchard, you would have to give up your current job, which pays $10,000 per year. If you ‘would find both jobs equally satisfying, and the annual interest rate is 10 percent, what is the highest price you would be willing to pay for the orchard? ‘The market for American flags is perfectly competitive. Suppose that, as of September 10, 2001, this market had scitled into a long-run equilibrium in which the market price per flag was $20: profits were zero; and market quantity was 10,000 flags annually. Assume that the industry constant costs industry. Show the current conditions by drawing two diagrams, one for the industry and one for a representative firm. b. Suppose that, as of September 11, 2001, demand for American flags rose considerably. Use as many diagrams as needed to predict the likely responses of a representative firm, and the industry. Do firms eam profits in the post-September 11 era? Explain. John Jones owns and manages a café in Ardmore, Oklahoma, whose annual revenue is $5000. ‘Annual expenses are as follows: Labor $2,000 Food and drink ‘500 Electricity 100 Vehicle lease 150 Rent 500 Interest on loan for equipment 1000 Calculate John’s annual accounting profit. John could earn $1000¢year as a recycler of aluminum cans. However, he prefers to run the ea In fact, he would be willing to pay up to $275/year to run the café rather than to reeycle. Is the café making an economic profit? Should John stay in the café business? Explain ‘The government of the Republic of Self-Reliance has decided to limit imports of machine tools to encourage development of locally made machine tools. To do so, the government offers to sell only a small number of machine tool licenses. To operate a machine tool import business costs $30,000 excluding the cost of the import license. An importer of machine tools can expect to earn ‘$50,000 per year. Ifthe annual interest rate if 10 percent, for how much will the government be able to auetion the import licenses? Will the owner ofa license earn an economic profit?