Download Answer - CSUNEcon.com

Economics 310
Second Exam
Spring 2004
Professor Kenneth Ng
COBAE
California State University, Northridge
Question 1
Question 1 (40 points)Consider the firm depicted on the next page which is
producing 100,000 units of output domestically using 4,000 workers
at a total cost of $100,000 at point A.
1. If the cost of labor in the U.S. is $20 per unit and the cost of
capital is $100, how many units of capital is the firm using. Place
you answer and your calculations in the box below and label all
relevant values on your graph.
$100,000=(4000*$20)=(X*$100)
X=20,000/100=200 units of capital
2.
3.
4.
Suppose the firm outsourced production to India where labor
costs are only $5 per unit. Depict the short and long run effects of
outsourcing on your graph.
What effect will outsourcing have on the capital/labor ratio? Will
the number of jobs in the world, India and the U.S. combined
increase of decrease? Depict on your graph and explain what is
happening in the box below.
Compute the ATC after outsourcing or if it cannot be computed
explain why. Put your computations or explanation in the box
below.
The ATC after outsourcing cannot be computed because the information
necessary to compute the combination of capital and labor used is not
available.
After outsourcing the price of labor has fallen
so the iso-cost and iso-output curves at
(200,4,000) are no longer tangent so the firm is
no longer producing efficiently.
Capital
The firm is using too much capital and not
enough labor.
The firm can either cost minimize and move to
point B where they are producing the same
output with a lower total cost or output
maximize by moving to C where they are
producing more output with the same total
cost.
In either case, the capital/labor ratio will
decrease
A
200
C
B
100,000
$100,000
4,000
20,000
5,000
Labor
Question 2
Question 2 (60 points). Consider the firm which outsources from
question (1). Draw their unit cost curves on the graphs before and
after outsourcing on the next page assuming that the market
clearing price is P1 before any outsourcing occurs.
1. Draw the unit cost curves for a second firm which refuses to
outsource on the appropriate graph.
2. If the prevailing market price of the good is P1 depict the quantity
produced by each firm and it’s profit or loss.
3. Use the market supply and demand curves below show the short
and long run effects of outsourcing. What will happen to the
number of firms, market output, firm output, short and long run
profits, and the number of firms that outsource.
4. Carryover the effects from your market supply and demand
curves onto the unit cost curves of the firms and show the effects
of outsourcing on both firms profits and output decision.
5. Discuss the winners and losers from outsourcing in the box
below.
Firm which outsources
MC
Firm which doesn’t
outsource
MC
ATC
ATC
MC
P1
ATC
Output
The short and long term effects of outsourcing.
Price
S After long run entry/exit
S After increasing wages
S Ralphs, Albertson’s,
and Vons
P1
P2
P3
Demand
Q
Curve
Mean
Standard
Deviation
Without Homework
With Homework
31.1
33.8
20.3
21.6
Students Taking
Exam
74
Number
Receiving
Grade
Percent
Receiving
Grade
Grade
Required Score
Normalized
Score
A
61
1.5
11
15%
B
41
0.5
14
19%
C
31
0
11
15%
D
20
-0.5
15
20%
24
32%
F
Administrative Details
One Week Mandatory Cooling Off Period.
Nothing concerning the exam, homework,
scoring etc. will be discussed until next Monday