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Econ 312. Information Economics and the Internet
Davis, Spring 2004
Problem Set #2
1. Jones Information Services. assembles consumer data-lists for retailers wishing to
place targeted advertisements. The primary variable input is labor. The short run
productivity schedule for the firm is as follows
Labor Data Jobs
1
2
2
6
3
9
4
11
5
12
Where a “data job” is one advertising list, and “labor” denotes a day of work.
a. Develop the marginal product relationship for the firm. Plot this relationship as a
graph. (Use a spreadsheet)
b. Identify the two factors that explain the shape of the marginal product schedule.
c. Suppose that labor can be hired for $100 per day. Develop a marginal cost
schedule (plotting Marginal Costs against Data Jobs) Explain the shape of the
Marginal Cost Schedule. (use a spreadsheet for your graph)
d. Now, suppose that a new database software package is developed that
dramatically increases productivity. After implementation of the new software
package, the total productivity schedule is as follows
Labor Data Jobs
1
3
2
9
3
13
4
16
5
18
1. Develop a new marginal product schedule. Plot this with your original
Marginal Product schedule, but highlight the new schedule with a
bolded line.
2. Develop a new marginal cost schedule. Plot this with your original
Marginal Cost schedule, but highlight the new schedule with a bolded
line.
3. Explain intuitively the relationship in the movements between the
Marginal Product and Marginal Cost Schedules.
2. Radarsonic.com provides remote depth-sounding services for recreational
fishermen planning vacations. The cost conditions for the firm are as follows
Q
0
1
2
3
4
5
6
7
8
9
10
TFC
10
10
10
10
10
10
10
10
10
10
10
TFC
TVC
AFC
AVC
ATC
MC
MR=AR
3
2
1
2
3.5
5.5
8
11
14.5
18
a. Fill in the missing blanks in the above chart (except for MR=AR)
b. Using a spreadsheet, graph the MC AVC and ATC schedules. Print
your chart
c. Explain the following
a. The shape of the Marginal Cost Schedule
b. The relationship between the Marginal Cost Schedule and the
ATC and AVC schedules
c. The relationship between the ATC and AVC schedules.
d. Suppose that Radarsonic.com sells its service in an essentially
competitive environment. Suppose that the company can offer as
many soundings as it likes at $6 per sounding.
a. Fill in the Marginal Revenue = Average Revenue column in
your table.
b. Plot the MR = AR column in your chart.
c. In your chart and in your table, identify the number of
soundings Radarsonic.com will offer.
d. Identify profits and/or losses earned by Radarsonic at a price of
$6
e. In the long run, would you expect the price to rise or fall?
Why?