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Homework II: BUSECN 1010: Managerial Economics, Spring 2017

Due Wednesday February 1, 2017 in class. No late submissions.

Instructions:
Submit a paper copy of the homework in class. Show your calculations to get credit.

1. The Longheel Press produces memo pads in its local shop. The company can rent its equipment and
hire workers at competitive rates. Equipment needed for this operation can be rented at $52 per hour,
and labor can be hired at $12 per worker hour. The company has allocated $150,000 for the initial
run of memo pads.
The production function using available technology can be expressed as:
Q = 0.25K0.25L0.75,
where Q represents memo pads (boxes per hour), K denotes capital input (units per hour), and L
denotes labor input (units of worker time per hour).

The marginal products of labor and capital are as follows:


MPL = (0.75)(0.25)K0.25L-0.25
MPK = (0.25)(0.25)K-0.75L0.75

a. Construct the isocost equation.


b. Determine the cost-minimizing input mix for an investment of $150,000 for a production run
of memo pads.
c. Compute the level of K used. [Hint: Use the cost minimizing ratio and the isocost equation to
solve]

a. C = wL + rK
150,000 = 12L + 52K

b. The appropriate input mix occurs where the


𝑀𝑃𝐿 𝑤
=
𝑀𝑃𝐾 𝑟

= K= → 13 𝐾 = 𝐿

c. Thus, for each unit of K used, 13 units of labor are used. The total amount of labor used is
150,000 = 12L + 52(L/13)
= 12L + 4L
= 16L
= 9,375
The amount of capital used per time period is
K = L/13 = 9375/13 = 721.15.
25𝑞2
2. Spacely Sprockets' short-run cost curve is: 𝐶(𝑞, 𝐾) = 𝐾 + 15𝐾, where q is the number of
Sprockets produced and K is the number of robot hours Spacely hires. Currently, Spacely hires 10
𝑞
robot hours per period. The short-run marginal cost curve is: 𝑀𝐶(𝑞, 𝐾) = 50 . If Spacely receives
𝐾
$250 for every sprocket he produces, what is his profit maximizing output level?
Calculate Spacely's profits.

The profit maximizing output level P = MC


𝑞
MC(q, K) = 50 = P = 250  q = 50.
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Spacely's profits are:


25(50)2
π = Pq - C(q, 10) = 250(50) - { + 15(10)} = 6,100.
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