Institute of Business Management

Semester: 1st

Course Instructor: Irfan Lal Total Marks:100 Weighted 10

Assignment No.4

Q#1
What is a production function? Why is the marginal product of labor likely to increase initially in the
short run

Q#2. You are an employer seeking to fill a vacant position on an assembly line. Are you more
concerned with the average product of labor or the marginal product of labor for the last person
hired? If you observe that your average product is just beginning to decline, should you hire any
more workers? What does this situation imply about the marginal product of your last worker hired?

Q#3. 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:

Number of Workers Number of Chairs

1 10
2 18
3 24
4 28
5 30
6 28
7 25
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.

Q#4
a. Fill in the blanks in the table below.
b. Draw a graph that shows marginal cost, average variable cost, and average total cost, with cost
on the vertical axis and quantity on the horizontal axis.

Unit of Fixed cost Var. cost T. cost MC AFC AVC ATC

output
0 100
1 125
2 145
3 157
4 177
5 202
6 236
7 270
8 326
9 398
10 490

Q#5
The short-run cost function of a company is given by the equation TC = 200 + 55q, where TC is the
total cost and q is the total quantity of output, both measured in thousands.
a. What is the company’s fixed cost?
b. If the company produced 100,000 units of goods, what would be its average variable cost?
c. What would be its marginal cost of production?
d. What would be its average fixed cost?
e. Suppose the company borrows money and expands its factory. Its fixed cost rises by $50,000, but
its variable cost falls to $45,000 per 1000 units. The cost of interest (i) also enters into the equation.
Each 1-point increase in the interest rate raises costs by $3000. Write the new cost equation.

Q#6. 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.

Q#7. The cost of flying a passenger plane from point A to point B is $50,000. The airline flies this
route four times per day at 7 am, 10 am, 1 pm, and 4 pm. The first and last flights are filled to
capacity with 240 people. The second and third flights are only half full. Find the average cost per
passenger for each flight. Suppose the airline hires you as a marketing consultant and wants to
know which type of customer it should try to attract—the off-peak customer (the middle two flights)
or the rush-hour customer (the first and last flights). What advice would you offer?

Q#8
Joe runs a small boat factory. He can make ten boats per year and sell them for $35,000 each. It costs
Joe $250,000 for the raw materials (fiberglass, wood, paint, and so on) to build the ten boats. Joe has
invested $500,000 in the factory and equipment needed to produce the boats: $200,000 from his own
savings and $300,000 borrowed at 10 percent interest (assume that Joe could have loaned his money
out at 10 percent, too). Joe can work at a competing boat factory for $60,000 per year

a. What is the total revenue Joe can earn in a year?

b. What are the explicit costs Joe incurs while producing ten boats?
c. What are the total opportunity costs of producing ten boats (explicit and implicit)?
d. What is the value of Joe's accounting profit?
e. What is the value of Joe's economic profit?

Q#9
a, The following table contains information about the revenues and costs for Barry's Baseball
Manufacturing. All data are per hour. Complete columns that correspond to Barry's production if P =
$3. (TR total revenue, TC total cost, AR= average revenue, MR=marginal revenue and MC=marginal
cost)
Q TR TC MR AR MC Profit
0 1
1 2
2 4
3 7
4 11
5 16
a. If the price is $3 per baseball, what is Barry's optimal level of production? What criteria did you
use to determine the optimal level of production?
b. Explain Aspiration level of output?

Q#10 Suppose that there are only one restaurant in the city and that has a same menu.
a. Draw the diagram of the cost curves (average total cost and marginal cost), demand curve, and mar-
ginal-revenue curve for one of the restaurants when it is in long-run equilibrium.
b. Is this restaurant profitable in the long run? Explain.
c. Is this restaurant producing at the efficient scale? Explain. Why doesn't this restaurant expand its out -
put if it has excess capacity?
d. In the diagram, show the deadweight loss associated with restaurant’s level of output. Does this dead-
weight loss occur because the price is higher than a competitive firm would charge or because the
quantity is smaller than a competitive firm would produce? Explain.
e. Suppose that the restaurant engages in an advertising campaign that is a huge success in increasing its
demand. In your diagram, show the effect of this advertising campaign and show the restaurant’s
profit in the short run. Can this situation be maintained in the long run? Explain.

Q11# Explain Increasing, decreasing and constant cost industry and draw supply curve of each
industry?

Q#12 Explain Monopoly Causes of Monopoly and its possibilities with the help of diagrams?

Q#13 Differentiate Perfect competition and Monopoly, Draw Demand and supply curve of Perfect
competitive and monopoly firm?

Q#14 Describe the deadweight loss, producer and consumer loss with the help of a diagram?
(Monopoly)

Q. 15
a. Sohail’s profit-maximizing business incurs an economic loss of $10,000 per year. Its fixed cost is
$15,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or
exit in the long run?
b. Suppose instead that this business has a fixed cost of $6,000 per year. Should it produce or shut
down in the short run? Should it stay in the industry or exit in the long run?