1. Calculating marginal revenue from a linear demand curve “Te blue curve onthe flowing graph represants the demand curv facing fim tha can et teow pices, Use the sraph input too to hep you answer te followin questions Yu wil not be raded on any changes ou make f this sraph Note: Once you eter a value in white fg, the groph and ny corresponding amounts in each gry els wl change according Graph Input Too! Market for Goods : “aan ca . es fs ema, aon ie i = a. Be N vl ‘QUANTITY (uns)(ee graph put toa change te numba oun te Quartty Demanded ls to determine the pres tat crespand (0 te predutn 60, 10, 20, 25, 30,40, and 50 unts of ouput. Celt the oa reveve for e8ch of tes production eves Then Oe eowng sah, use the green ome (nate symbol ple te resus @ ” = ge QUNNTTTY arr fais) Pe: mmxponosos lne Exlenation © “otal revenues detne as pice tmas quantty. When he frm produces 20 units, reeves ne revenue, S (0 0} 5 2 pelt on teeta revenue (7) cure When product 10 nts, can leach ox $40, 0 steal even S40 peru 1 ams = $400. Teer, (10, 400) the ret pon the TR curve. You ca acl er ofthe pls nt se wy Catatte te total even te fem produes 10 versus unt. Then, eae the marginal revenue othe 100 unt produced “Te marginal even ofthe 10th nt prosuce [EHV Foes mm 12 esate ttl revenue te fem proces 20 versus 19 vis, Then clete te mara evenve athe 200 nt rode Te marginal revenue ofthe 20 ant produced [S77 Pons mm 73 Marginal revenue ste aonal revenue recive frm producing an sling ane more ui of oad. You ean cle this value by suotracing the ttl even a one unt as tha the dese cutout lve (Q~ 1) rom the tea revenue the dese output evel (Q) For ‘example, the fem produces 9 uns, it can Sl ech fr E41. Therefor, ts even at that ant sl peru 9 uns = S369, Fe rodcas 10 units can 5 ach fo $0, ss total revere Is $40 per wi 10 unis = S40 Therefore, you can ekusts the firm's mergi revenue en the 10 nti the long my‘esd on your arsars rm the previous question, and een tat te marginal revenue curve sight ine use te lack Hine (ois synbal) {to loth ten’ marginal revenue curve on the flowing graph. (Round lvls to the nearest increment of 10.) [MARGINAL REVENUE (ote) iT un) @ Pos: mm 115 Pos: mm 1/1 Expanatn ose Extanation = ‘The marginal revenue of he 10th un $31, and the mergna revenue ofthe 208 une $11. Rounding tothe nearest increment of 10, the ‘wo points needed to plot the marginal revenue curve 2 (10, 30) and (2, 10}. ta your magia venue raph, you can ate that when ttl revenue deeresting, marginal venue is Comparing your total revenue ge negative Vv Pits: A xpanatin Cove Explanation = ‘Te maximum of he total revue graph ocurs a a pce of $25 per une ane an output of 25 uns, Ths peak corespendst the point on the erga revenue cirve a wich mero revenues equ to zero. Reeause marin revenue a defined este change total vente Fem producing another unit the marginal revenue curve comesponds tote lope ofthe taal evenue curve ata given pont. So, whenever marginal ‘revenues positive total revenue f not yet maximized and must be increasing (because producing anadionl unt increases otal even); land whenever itis negative, producing that ast unt actualy lowers ttl revenue. AES pea, Lal evenues nether ring nr Fling ‘therefore, ts slope is equal t zero,Practice Assignments Marginal analysis and profit maximization ‘Suppose Alon gives hares on Saturdays to make extra money. Shel the onl perso in town cating halon Saturéays are therefore hak some market power Assume tht she doesnt incur xed costs, andthe only significant varie cost to Alison in giving alts shrine, As she gives more nsret,Alzon mut neesengly toga ster vaiale Satara aries. For exbmpl, she hes ane hat he forges realng he paper ater breakfast. If she gies two hari, she gives up reading the paper seping an extra hatha and 50 on ‘Alsons crs are a vane arup wing to py between $20.00 and $28.00 fora hare. Assume hat Alon cant pric scrminae |e, charge ttal revenue minus total cost (which isthe sum of explit costs and ipl cst). In this «case, total costs the sum ofthe wholesale cost, mages and uti bil forgone salary income, and forgone renal income. Therefore, you can compute eeanami prof inthe folowing way: Beonamic Prot = Tol Revene ~ Taal Coss Tazat Revenue~ Total Expt Con -+ Toa mpi Cos) = 3723000 ~( (8823000 + 5257.00) + ($20.00 + 52:000}) = 311,0005 put and outputs Duan Pectrmance Pate 8 ral restaurant in Denver thas iene pes. ana wry ny Ken barely enough om fo the tee overs in wes her workers Boke the plazas. ants ged las oloating hero py he ret for neta vers for the nest year: enue oF sand because Juanes htchan canna fr moe than te ovens, una anna range the numberof vers se ses ner production of >on ls them know how many workers She neds foreach day te eek Inthe Sher run, ese workers re variable input, ad he ions are ed ¥ Inputs 1 Exianation ose Eats = | fied input 3 kn of put whee the quant cannot be changed nthe sort run. Therefore the ovens re eed nuts. Because ana “ean vary the numba of workers she hires base on he rection eats ner wrkers ae 2 variable np ants daly production sche pretente nthe fallow ate ‘in be aks compte the Marginal Prot of Labor elmo fer each worker tabor ‘output Marginal Product of Labor LCuamber of workers) (Pizzas) _ (Pizzas) a (ay [av J CayFi inthe Blanks to complete the Marginal Product of Labor column foreach worker Labor Output Marginal Product of Labor (Number of workers) (Pizzas) (Pizzas) s - Tov 1 70 [= ai 8 eat av a [av “es [tv Ponts: mms 1/1 Explanation: Close Exlonation “The marginal product of labor i the change in quant of pizza output when an addtional worker i hired. For example, the fst worker raises the output from 0 to 70 pizas par day, s0 the marginal produc ofthe frst worker is 70 plzas per day. When Juanita hires the second worker, output increases from 70 to 120 piezas per doy, 0 the margnel product of the second workers 50 pezbs per dy. The rest ofthe ‘values can be calculated in 2 simiar manner. (nthe fellowng graph, let Juan's production function using the green points (trance symbo). "Note: Plot your points in the order In which you would lke them connected, Line segments il connect the points automata. Hint: Be sure to pot the fist point a (0,0)‘Note: Plot your points in the order in which you woul ke them connected. Line segments wil onnedt the points automaticaly ‘in: Be sure opt the fst point at (2, ©). ‘QUANTITY oF OUTPUT Pzza) {LABOR umber of worker) @ Ponts: Sm 2se the orange points (sauare symbol) plot Juanita’ total cst curve on the folowing araph using the quanties from the preceang table @ = ¥ ‘TOTAL COST (oles) ‘QUANTITY OF OUTPUT Pizzas) Ponts: 2 /“Tre oF False: The shape ofthe production function refects the lw of eimiishing marginal returns v8 te Ponts: Sm 1/2 explanation ‘ose Explanation “Te slope ofthe production funtion measures the change in output fr each adiona uni of labor input (the marpinal product of labor). From the graph, you can see thatthe production function becomes fatter asthe numberof workers increases, Ths represents the property of minting margins product of abo.6. Total, average, and marginal product Happy Cupcake, a cupcake shop, has the flowing marginal product curve (labeled MP) forts dally production. 1 i oy de neon Prt 3 He i « i. 2 * = 4 Ze i. a © Pons: mm 1/1se the MP curve ofl inthe Tel Prat column inthe flowing table oe eens emcee 7 : es 2 aan (au cua)/ Amani racer 2 sy zy n zy = 3 vael—s — 5 Pts: Explanation Close Explonavon = ‘There sno eutout when zero workers are hired, According tothe MP curve, adding the Fst worker yieés 3 marginal product of 10. The second worker contributes © moraine! product of 4, £0 total product ineeases to 10-+ = 24 eupeakes. Using simi eaeuations, you can in the tof the values ofthe total product: Marginal Product Total Product Workers (Per worker) (Per hour) ° 10 0+ 10= 10 2Marginal Product Total Product Average Product Workers (Per worker) __(Parhour) _ (Per worker) ° ° 1 10 20 a 2 26 4 ° a 5 ro Marginal product (MP) and average product (AP) curves aways intersect at the maximum ofthe AP_¥ curve Points: Sm 1/1 explanation: Close Explanation ‘The NP curve intersects the AP curve atthe point of maximum average product, When the marginal units contnbuton exceeds that ofthe average unt, the average Hiss; thus, when MP curve los above the AP, the AP curves ring. When the marginal unit's cntbution is below that ofthe average unt the average fal; ths, when the MP cuve lis below the AP curve, the APcuve fas. When MP and AP are equal (the point of intersection between the curves), APs nether increasing nor decreasing but sat 2 maximum,‘hes hess major manufacture of bicycles Curent, the company reduces bikes sing erly on factory However, i considering expanding production to to or even tree fctarie, The folowing table shows the compen short-run average ttl cst (SRATC) each month for varius levels of production it uses one, two, or tre facaries. (te: equa the ttal quant of bikes proved by lator) ‘Average Total Cost (Dolars per bike) Number of Factories @= 100 Q=200 Q=300 = 400 Q=500 = 600 2 st 30016160000 3 mm 400 = 180200060 ‘Suppose Me's kes i curenty producing 620 bikes per marth nis aly factory. short-run average ttl cost [S720 per be. Pot: mm explanation: ose Explanation = IF k's Bikes has one facto the average total cost of producing bikes can be read rom the fs row ofthe table, You cans rom the table thatthe average cost of preducing 600 bes per month $720 per bk. ‘Suppose He's Bikes expecting to produce 600 bikes per month far Sverl yer. In this case, nthe lng run It would chose to produce Bikes ing ene factories ¥ Points: mm(nthe following araph, plot the three SRATC curves fr Ike's Bikes from the previous table. Specialy, use the green pont (triangle symbol) f plot (ns SRATC curve operates one factory (SRATC); use the purple pants (alamand symbol) to plot ts SRATC curve iit operates two facroies ( SRATC:); ond use the orange pont (squte symbol) to pot ts SRATC cure It operstes thre factories (SRATC:). Final ple the long-run average total cost (RATC) curve for Ike's Bikes using the blue points (cele sya). "Note: Plt yur pont nthe order in which you would ike them connected, Line segments wil connect he pnts automaticaly @® a t® y la srare, Lew | i. ke | zx ‘srare, fo : i ow i rare ‘QUANTITY Bes) Points: 2/2{nthe folowing table, ndicate whether the long-run average cst curve exhib econcmies of Scale, constant retuns to scale, or diseconomies of sale foreach range o bike production Range Economies of Scale Constant Returns to Scale Diseconomies of Scale Fewer than 300 bikes per month ° ° ° Between 300 and 400 bikes per month > * 5 ‘ore than 400 bikes per month 0 0 ® Potts: 1/1 Explanation ose Explanation ~ _A fem experiences economies of scale when long-run average total cot fll at increases production, Inthe long run, ke Bikes can produce 100 bikes per month for an average total cost of $360 per bike, 200 bikes per month fr an average total costo $200 per bike, and 300 bikes per month for an average total cost of $160 per bike, The average tata cst stays constant at $160 within the range of 300 to 400, tikes per month and increases when Ike's Bikes produces more than 400 bikes per month. Therefore, experiences economics of scale when produces fewer than 300 bikes per month. Graphically, this seen asthe dounwar-slopng portion of tk'sSkess LRATC curve |fem experiences constant returns to scale when it can increase production without changing lng-run average total cost. In the long rn, 1 Bikes can prodoce 300 or 400 bikes per month for an average tots cost of $160 per bike. Therefore, Ic experiences constant returns to Scale within this range. Graphically, this is seen asthe horizontal portion of hes LRATC curve ‘fem experiences diseconomies of scale when long-run average total cost increases as Increases production. Inthe long run kes Bikes an produce 400 bikes er manth for an average total cost of $160. As Ike's Bikes increases production further, however, the average total ost ‘ses. Therefore, it experiences dseconcmies of scale when it produces mere than 400 bikes per month. Graphically his is seen asthe upward sloping potion of hes LRATC curve1 te ong run, if the fem decides to Keap output at ts intial eel, what wil ely do? (© su to operate on ATC © shutdown (© stay on ATC; but decrease to the pont touching LRATC YY ® spin to operate on ATC Pots: mm 1/2 Siptanation: Close Expianation = Jn the short run, the fem ean choose to operate at any pont along ATC, oven Its nial evel of xed capital resources In tis cae, It choosas to operate on ATC) and produce at Q3. In the long run tan vary Is ied capital resources and produce ata lower cost, That nthe long run, fms can choose the lve f output they want to produce and select he last cost combination of resources required to reach that evel. Lzas-cost combinations are connected by LRATC, and inthis case, the publishing frm can pow produce Qo at lower cost shits to ATC: ‘rue or Flee: The minimum efilent scale achieved a the minimum point on each aver 0 Te @ ratce Pots: mm 1/29. Vatious measures of cost Douglas Furs small manufacturer of faker boots in Detroit. The following table shows the company's tol cost of production at various procucion quanttis. ‘iin the remaining calls ofthe flowing tobe. Quantity Total Cost Marginal Cost Fixed Cost Variable Cost Average Variable Cost Average Total Cost (Pairs) (Dollars) _ (Dollars) (ottars) (Dollars) (Dollars per pair) (Dollars per pair) oma Tay W = J 2 Soe Be (omy ay (amy 2 240 = Ciwy Civ [sv ee a (sy [sv + oe EY iy Cay lv CaaS 2" 1 ay sev 6 540 1200 [_ aaov Points: mm 2/3(on the folowing graph, plot Doulas Fu's average total cost (ATC) curv using the green points (tangle symbol). Nex, petits average vanable cost (AVC) curve using the purple points (dlamond symbol). Final, pt fs marginal cost (MC) curve using the orange points (sqvere symbol). (Hint: For ‘ATC and AVG, pot the points onthe integer; for example, the ATC of producing one pair of Bots is $200, so you should start your ATC curve by placing # green pont at (1, 200). For MC plot the points between the integers: For exemple, the MC of inreasing production from zero to one pair of ‘boots Is $80, s0 you should start your MC ewe by placing an orange square at (05, 80).) Note: Plot your points inthe order in which you would ike them cannecte Line segments will connect the points automatically @ . 1 wt iz: T Aaeeceet i | i ae ave eee i ‘wo ey Eo : i ‘QUANTITY Pas obo)0, Sunk costs and decision making Raphael has plans to goto an opera and already has a $100 nonrefundable, nonexchangeabe, and nontranstrable ticket Now Susan, whom Raphael nas wanted to date for ong time, asks him to a party. Raphae! would prefer to go to the party with Susan and forgo the opera, buthe doesnt want to waste the $100 he spent on the opera ticket From the perspective ofan economist f Raphae decides to goto the party wth Susan, what has he ust done? (© made a choice that was not optimal © Comet ignored a sunk cost © ncorectiy allowed 2 sunk cost to infuence his decision = Poot: mm 1/1‘Suppose the sales tax on pizza sauce is removed, so the price of pizza sauce decreases to $14 per gallon, Inthe flowing table, inccate how each cost and curve is affected, fatal. cost Effect on Cost and Curve ‘ATC __ Decreases, and therefore the curve shifts down AVC __Decreases, and therefore the curve shifts down _¥ AFC 15 unaffected, and therefore the curve does not shift_¥ = Ponts: mmm 1/112, Individual Problems 4-2 ‘ou ro game-day shuttle service or parking services forthe lca all cub. Suppose you ar companaited §24 per customer, per ride. tn ater ‘words, your marginal revenve is $24, Your costs for diferent customer lds are summarized inthe follwing table For each customer lon, calulte both the marginal cost and the average cost. Then answer the question that flows Note: Round your answers tothe nearest cot. acl a Sa: 2 Ok ae ET ey saat coerrenncserny oe SUE areal TE Eee Potts: mm 4/11m order to maximize pros, you shoud cary 5_¥ customers per lad Points: mm 1/1 explanation Close explanation ~ Hom many customers to cary in ‘making this decision. 1f marginal revenue excoeds marainal ost, you should carry more customers, because you wil earn higher profits when the revenue obtsined from adding 2 customer exceeds the cost of adding that customer. IF marginal revenue is less than marina cst, sdcing 3 1h load is an extent decision, Marginal revenue and marginal costae tus the relevant factors to consider in customer wil lower your profs, sot eam higher profs you must carry fewer customers each de. The prof maximizing number of ‘customers occurs when marginal revenue equals marina cost In this case, the marginal revenve ofeach customer ($24) fs equal to marginal exst a a customer load ofS customers. At output levels ower ‘than this, marginal revenue Is greater than marginal cost For example, the marginal revenue ofthe fourth customer (and all customers) i $28 Homever, tne marginal cost ofthe fourth customer is only $18.00, Since the marginal revenue is areater than the marcinal cst, there is an Incantve to inereate the customer lad. Ukewise, at customer levals beyond 5, the marginal revenue I ewer than the marginal cst ofeach ‘customer For example, while the marginal revenue ofthe sixth customer is $24, the marginal east of that same customer is $30.00. Thus, there Isan incentive to reduce the customer load in order to increase profs. Is only at 5 customers, where marginal revenue sequal to marginal cost, that theres ne incentive to increase or decrease customer loads, because doing either would decrease profs.13. Individual Problems 4-4 ‘Your company is contemplating bidding on an REP (Request For Proposal) to produce 100,000 units of @ specialized part. Suppose, however, thatthe requesting company realy needs only 90,000 units of te part. Also assume that, Because the part is specialized, potential suppliers do not yet possess the machines an factories needed to praduce It and that overhead expenses involved in production have yet tobe incurred, ‘Suppose the average costs ofall potential suppliers ae as fllons ‘Average Total Cost Units (Dollars Per Unit) 90,000 + 100,000 3 ‘rue or False: The requesting company can sole lower bids by requesting 100,000 units as opposed to 90,000. ve me © Face Polos: mm 1/244, Individual Problems 4-5 Your insurance frm processes caims through its two facies: Facity A and faciityB. Each month, fait & handles 6,000 claims an incurs in {$50,000 fixed costs and 454,000 in verable costs. Each mont, foity handles 5,000 and incurs $174,000 in xed costs and $50,000 in vibe Hint: Be careful not to commit the sunk-ost flay in your analysts you antipate a moderate deerese in the number of sims, you should ay off workers in focity _&__V In order to decrease cost45, Individual Problems 4-6 [Acopy company wants to expand production. Ie currently has 20 workers wha share eight capers. Twa months ago, the frm added two copiers, and ‘output increased by 40,000 pages per day. One month ago, the firm add fve workers, and productivity also Increased by 25,000 pages per day. A copier costs about five times as much asa worker. [Assume these increases in procuctvity per worker an¢ productivity per copier are good proses fr future increas in productivity when hiring additional workers or purchasing dion copiers, asad on this information, the copy company should lee another worker ¥ Inrder to expand output. Points: mmm 171