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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?