Download Economics 373 – Industrial Organization and Policy

Economics 301
John Moran
Problem Set #4
Chapter 9 Problems
3, 4, 8
Additional Problems
1 - 10 listed below
1. Congress is considering legislation that will provide additional investment tax credits
to businesses. Effectively, an investment tax credit reduces the cost to firms of using
capital in production. Would you expect labor unions to lobby for or against such a
bill? Explain.
2. You have been hired to replace a manager of a firm that uses only two inputs, capital
and labor, to produce output. The firm can hire as much labor as it wants at a wage of
$5 per hour and can rent as much capital as it wants at a price of $50 per hour. After
you look at the company books, you learn that the company has been using capital
and labor in amounts that imply a marginal product of labor of 50 and a marginal
product of capital of 100. Do you know why the firm hired you? Explain.
3. Standard Enterprises produces an output that it sells in a highly competitive market at
a price of $100 per unit. Its inputs include two machines (which cost the firm $50
each) and workers, who can be hired on an as-needed basis in a labor market at a cost
of $2800 per worker. Based on the following production data, how many workers
should the firm employ to maximize its profits?
Machines
2
2
2
2
2
2
2
Workers
0
1
2
3
4
5
6
Output
0
60
100
129
148
160
168
4. Distinguish between diminishing returns to a variable input and decreasing returns to
scale.
5. A factory adds a worker and subsequently discovers that the average product of its
workers has risen. True or False? “The marginal product of the new worker is less
than the average product of the factory’s workers before the new employee’s arrival.”
6. A firm purchases capital and labor at prices of r = 6 and w = 4, respectively. With the
firm’s current input mix, the marginal product of capital is 12 and the marginal
product of labor is 18. Is this firm minimizing costs? If so, explain how you know. If
not, explain what the firm ought to do.
7. The marginal rate of technical substitution can be measured by
a) The slope of an isoquant.
b) The ratio of the marginal products of the two inputs.
c) The amount of capital that must be substituted for a given reduction in labor in
order to keep output constant.
d) All of the above.
e) None of the above.
8. Which is a true statement?
a) Decreasing returns to scale and diminishing marginal returns are two ways of
stating the same thing.
b) Increasing returns to scale is a short-run concept and diminishing returns is a
long-run concept.
c) Constant returns to scale is a short-run concept and decreasing returns to scale
is a long-run concept.
d) All of the above are true.
e) None of the above are true.
9. Recently, many groups have begun advocating a doctrine known as the “living
wage.” The idea is that all members of society are entitled to a wage sufficient to
meet the basic costs of living. Leaving aside for the time being issues related to
fairness and social justice, we will focus on the positive economic consequences of
living wage ordinances. In particular, suppose that the city of Syracuse is considering
adopting a living wage ordinance that would require all businesses operating within
the city limits to pay a minimum wage of $15 per hour. Consider a university
operating within Syracuse that produces an educational output using only two inputs:
faculty members, F, who are paid more than $15 an hour, and teaching assistants, A,
who are paid less than $15 an hour. Suppose that in producing a given quantity of
educational output, Q, (measured in terms of the number of students enrolled at the
university), the university can substitute between faculty and teaching assistants, but
that such substitutions are subject to diminishing marginal rates of substitution.
Suppose that at the time the ordinance is being debated the size of the incoming class,
Q, has already been determined. It is observed that the ordinance enjoys widespread
support from faculty members but, curiously, not from the teaching assistants who
would presumably benefit from the law. Can you offer an explanation for this
apparent paradox? Please illustrate your explanation using the relevant graphical
analysis.
10. A certain student who is cramming for final exams has only six hours of study time
remaining. Her goal is to get as high of a grade point average as possible in three
subjects: microeconomics, macroeconomics, and econometrics. She must decide how
to allocate her time among the subjects. According to the best estimates she can
make, her grade in each subject will depend upon the time allocated to it according to
the following schedule:
Microeconomics
Hours of
Grade
Study
0
20
1
45
2
65
3
75
4
83
5
90
6
92
Macroeconomics
Hours of
Grade
Study
0
40
1
52
2
62
3
71
4
78
5
83
6
86
Econometrics
Hours of
Grade
Study
0
80
1
90
2
95
3
97
4
98
5
99
6
99
How should the student allocate her time? What principle does your answer illustrate?