Soal Microeconomy 2

1. In 1998, the total demand for U.S. wheat was Q = 3244 - 283P and the domestic supply was QS =
1944 + 207P. At the end of 1998, both Brazil and Indonesia opened their wheat markets to U.S.
farmers. Suppose that these new markets add 200 million bushels to U.S. wheat demand. What will
be the free-market price of wheat and what quantity will be produced and sold by U.S. farmers?

2. Connie has a monthly income of $200 that she allocates among two goods: meat and potatoes.

a. Suppose meat costs $4 per pound and potatoes $2 per pound. Draw her budget constraint.

b. Suppose also that her utility function is given by the equation U(M,P) = 2M + P. What
combination of meat and potatoes should she buy to maximize her utility? (Hint: Meat and
potatoes are perfect substitutes)

c. Connie’s supermarket has a special promotion. If she buys 20 pounds of potatoes (at $2 per
pound), she gets the next 10 pounds for free. This offer applies only to the first 20 pounds she
buys. All potatoes in excess of the first 20 pounds (excluding bonus potatoes) are still $2 per
pound. Draw her budget constraint.

d. An outbreak of potato rot raises the price of potatoes to $4 per pound. The supermarket ends
its promotion. What does her budget constraint look like now? What combination of meat and
potatoes maximizes her utility?

3. The marginal product of labor in the production of computer chips is 50 chips per hour. The
marginal rate of technical substitution of hours of labor for hours of machine capital is 1/4. What
is the marginal product of capital?

4. Suppose a chair manufacturer is producing in the short run (with its existing plant and equipment).
The manufacturer has observed the following levels of production corresponding to different numbers
of workers:

a. Calculate the marginal and average product of labor for this production function.
b. Does this production function exhibit diminishing returns to labor? Explain.
c. Explain intuitively what might cause the marginal product of labor to become negative.
5. A firm has a fixed production cost of $5000 and a constant marginal cost of production of $500 per
unit produced.

a. What is the firm’s total cost function? Average cost?

b. If the firm wanted to minimize the average total cost, would it choose to be very large or very
small? Explain.

6. A competitive firm has the following short-run cost function:

a. Find MC, AC, and AVC and sketch them on a graph.

b. At what range of prices will the firm supply zero output?

c. Identify the firm’s supply curve on your graph.

d. At what price would the firm supply exactly 6 units of output?