North South University

School of Business and Economics

MBA Program, Spring 2021
Managerial Economics
BUS 525: Final Assignment
Last Date and Time of Submission: May 23, on or before 10AM.

Final Assignment

1. Assume that Ms. Desdimona, the owner, and manager of the Fine Duplicating Service
located near your university and she is seeking to fill a vacant position. Should she be more
concerned with the average product of labor or the marginal product of labor for the last
person hired? If she observes that average product is just beginning to decline, should she
hire any more workers? She estimates that the additional workers would generate the
following output. What does this situation imply about the marginal product of your last
worker hired? State how the law of diminishing returns is reflected in the shape of the total
product curve and indicate the relationship between diminishing marginal return and the
stages of the production. How would you determine the various stages of production from
this table? Explain intuitively what might cause the marginal product of labor to be
negative.

Workers Hired 0 1 2 3 4 5 6 7 8
Total Product (Q) 0 12 22 30 36 40 40 37 32

2. (a) Assume that industry X is characterized by perfect competition, so every firm in the
industry is earning zero economic profit. If the product price falls, no firms can survive.
Do you agree or disagree? Discuss. (b) Using a hypothetical example, show the output
supplied by a firm and the profit of the firm assuming that the firms are operating under a
perfectly competitive industry. When would you expect to see entry into or exit from the
industry in the long run? What effect will entry into or exit may have on the market price.?
How would you determine the lowest price at which the firm would sell its output in the
long run?
3. (a) Explain intuitively why a firm’s average cost curves are U-shaped and why does its
average variable cost curve achieve its minimum at a lower level of output than the average
total cost curve? (b) You are given the following data on output and inputs for 10
production periods:

TIME OUTPUT CAPITAL (K) LABOR (L)

1 225 12 20
2 240 14 22
3 278 10 24
4 212 14 18
5 205 12 20
6 297 16 24
7 242 16 20
8 155 10 14
9 212 8 20
10 180 8 14

Estimate the parameters (A,  ,  ) of Cobb-Douglas production function using

the Least-squares (OLS) regression method. [ Assume Q = AK  L ]. Use the
estimated parameters to determine: Returns to Scale, Equations for the marginal
product of labor and Capital. Calculate the marginal products of capital and labor
for the input combinations: K = 10, L = 25. Make a comment based on your
findings.

4. (a) A micro-entrepreneur produces caps and hats for women. The output-cost data of the
business is reproduced below:

Output Total Cost

50 890
100 920
150 1000
200 1260
250 1470
300 1850
350 2410

Using the above data estimate total cost equation and determine the average and marginal
cost functions. Determine the output rate that will minimize average cost and the per-unit
 cost at that rate of output. Based on your findings at what price the firm would make
positive economic profit and what price it would earn negative economic profit.

(b) Complete the following table. Using the following cost data how would you estimate
the short run supply curve. If there are 20 firms in the industry, what would be the industry
supply?

OUTPUT FC VC TC AFC AVC ATC MC

0 50
10 10
25 70
45 0.67
70 0.4
105 50
135 110
155 0.45
170 0.67
180 140
180 150 0.56

5. Explain the managerial implications of the following figure:

Bonus Question (Optional): “Learning curves and economies of scales are not necessarily the
same thing.” Justify your position with the statement.”