Problem 1

Consider a firm that has just built a plant, which cost $20,000. Each worker costs $5.00 per hour. Based on this information, fill in the table below.

Problem 2

The table above shows the weekly relationship between output and number of workers for a factory with a fixed size of plant.

a. Calculate the marginal product of labor.

b. At what point does diminishing returns set in?

c. Calculate the average product of labor.

d. Find the three stages of production.

Problem 3

Mr. Lee operates a green grocery in a building he owns in one of the outer boroughs of New York City. Recently, a large chemical firm offered him a position as a senior engineer designing plants for its Asian operations. (Mr. Lee has a master’s degree in chemical engineering.) His salary plus benefits would be $95,000 per year. A recent annual financial statement of his store’s operations indicates the following:

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Revenue $625,000

Cost of goods sold 325,000

Wages of workers 75,000

Taxes, insurance, maintenance, and

depreciation on building 30,000

Interest on business loan (10 %) 5,000

Other miscellaneous expenses 15,000

Profit before taxes $175,000

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If Mr. Lee decides to take the job, he knows that he can sell the store for $350,000 because of the goodwill built with a steady clientele of neighborhood customers and the excellent location of the building. If he would still hold onto the building, he knows he could earn a rent of $50,000 on this asset. If he did sell the business, assume he would use some of the proceeds from the sale to pay off his business loan of $50,000. He could then invest the difference of $300,000 (i.e., $350,000 – $50,000) and expect to receive an annual return of 9 percent. Should Mr. Lee sell the business and go to work for the chemical company?

In answering this question, also consider the following information:

a. In his own business, Mr. Lee works between 16 and 18 hours a day, 6 days a week. He can expect to work between 10 and 12 hours a day, 5 days a week, in the chemical company.

b. Currently, Mr. Lee is assisted by his wife and his brother, both of whom receive no salary but share in the profits of the business.

c. Mr. Lee expects his salary and the profits of his business to increase at roughly the same rate over the next 5 years.

Problem 4

A perfectly competitive firm has total revenue and total cost curves given by:

TR = 100Q

TC = 5,000 + 2Q + 0.2 Q2

a. Find the profit-maximizing output for this firm.

b. What profit does the firm make?

Problem 5

Suppose three firms face the same total market demand for their product. This demand is

P Q

$80 20,000

70 25,000

60 30,000

50 35,000

Suppose further that all three firms are selling their product for $60 and each has about one third of the total market. One of the firms, in an attempt to gain market share at the expense of the others, drops the price to $50. The other two quickly follow suit.

a. What impact would this move have on the profits of all three firms? Explain your reasoning.

b. Would these firms have been better off in terms of profit if they all had raised the price to $70? Explain.

Problem 6

Because credit card companies and banks must charge the same interest rate on credit cards to all borrowers, there is an adverse selection problem with credit cards. How does a credit card company or firm know whether a person will be a high-quality borrower (i.e., one who pays the debts) or a lower-quality borrower (i.e., one who does not pay debts)?

Describe

a. how the restrictions of a single rate leads to an adverse selection problem, and

b. at least two potential means that credit card companies can use to try to lessen this problem.