TOPIC 2 EXERCISES

Exercise 1

Consider a Transport Service supply function: Qs = 60 + 5P – 12 PI + 10F , Where Qs = quantity

supplied, P = price of the Transport Service, PI = price of a key input in the production process,
and F = number of firms producing the Transport Service.
a) Interpret the slope parameters on P, PI, and F.
b) Derive the equation for the supply function when PI =$90 and F = 20.
c) Sketch a graph of the supply function in part b. At what price does the supply curve
intersect the price axis? Give an interpretation of the price intercept of this supply
curve.
d) Using the supply function from part b, calculate the quantity supplied when the price of the
Transport Service is $300 and $500.
e) Derive the inverse of the supply function in part b. using the inverse supply function;
calculate the supply price for 680 units of the Transport Service. Give an interpretation of
the supply price.

Exercise 2

The following a Transport Service supply function shows the quantity of mode X that operators
offer for sale (Qs):

Qs = 19 + 20Px - 10PI + 6T - 32Pr - 20Pe + 5F

where Px is the price of X, PI is the price of labor, T is an index measuring the level of
technology, Pr is the price of a mode R that is related in production, Pe is the expected
future price of mode X, and F is the number of firms in the industry.

a) Determine the equation of the supply curve for X when PI = 8, T = 4, Pr = 4, Pe = 5, and F

= 47. Plot this supply curve on a graph.
b) Suppose the price of labor increases from 8 to 9. Find the equation of the new supply curve.
Plot the new supply curve on a graph.
c) Is the mode related in production a complement or a substitute in production? Explain.
d) What is the correct way to interpret each of the coefficients in the general supply function
given above?

Exercise 3

Using a graph, explain carefully the difference between a movement along a Transport Service
supply curve and a shift in the Transport Service supply curve.

Exercise 4

Other things remaining the same, what would happen to the supply of a particular
mode if the following changes occur?
a) The price of the mode decreases.
b) A technological breakthrough enables the mode to be produced at a significantly lower
cost.
c) The prices of inputs used to produce the mode increase.
d) The price of a mode that is a substitute in production decreases.
 e) The managers of firms that produce the mode expect the price of the mode to rise in the
near future.
f) Firms in the industry purchase more plant and equipment, increasing the productivecapacity
in the industry.

Exercise 5

A Bus Travel Agency plans to serve 1,000 passengers per day of mode X. The Bus Travel Agency’s
production engineer finds two technically efficient processes (i.e., input combinations of labor and
capital) to produce 1,000 passengers per day:

Process 1 Process 2

Labor 10 8

Capital 20 25

a) If the production function for the existing technology is Q = f(L, K), where Q is the maximum
possible output, L is the amount of labor used, and K is the amount of capital used, then f (10,
20) =_______ and f (8, 25) =___________ .
b) If the Bus Travel Agency must pay $200 per day for a unit of labor and $100 per day for a
unit of capital, which process is economically efficient?
c) If the Bus Travel Agency must pay $250 per day for a unit of labor and $75 per day for a unit
of capital, which process is economically efficient?

Exercise 6
faisant en aller-retour
Cameroon Airline flies passengers between Yaounde and Douala, making one round-trip daily using
loué avion
a leased Boeing 737 aircraft. Consider the number of passengers served daily as the output for the
soit
airline. Identify each of the following costs as either a variable fixed, or a quasi-fixed cost:
a) Cost of in-flight snacks and beverages for passengers.
b) Expenditure on jet fuel.
c) Labor expense for pilots.
d) Monthly lease payment for Boeing 737 during the term of the lease.
e) Monthly fee at two airports for passenger check-in/ticketing counter space ( airports charge
airlines on a “pay-as-you-go” basis).
Exercise 7

Fill in the blanks in the following table:

Total Total Average Average Average
Total fixed variable fixed variable total Marginal
Output cost cost cost Cost cost Cost cost

100 _____ _____ 1,000 _____ _____ _____ _____

200 _____ _____ _____ _____ 9 _____ _____
300 _____ _____ _____ _____ _____ _____ 9.50
400 7,300 _____ _____ _____ _____ _____ _____
500 _____ _____ _____ _____ _____ 16.78 _____
600 _____ _____ 6,000 _____ _____ _____ _____
700 _____ _____ _____ 5 _____ _____ 12.50
800 12,150 _____ _____ _____ _____ _____ _____

Exercise 8

A Transport Service Provider Company whose total cost is given by

TC = 120 + 45Q − Q 2 + 0.4Q 3

Make out its AC (average cost), FC (Fixed cost), VC (variable cost), AVC (Average \variable cost)
and AFC (Average fixed cost) functions.

Exercise 9

Let the production function of a Transport Service Provider Company. be given by

Q = 25LK

where Q is the number of trips produced in the month, L is the number of workers employed, and K
is the number of buses used in the production. The monthly wage rate is 3,000 CFAF per worker and
the monthly rental rate for a bus is 6,000 FCFA. Presently the Transport Service Provider Company.
employs 25 workers and 40 buses.

1. Give the current average product of labor for the Transport Service Provider Company.
2. Give the current marginal product of buses? (Assume 1 unit increase in buses.)
3. Does Trips’ production function display increasing, decreasing, or constant returns to scale?
Explain.
4. Give the total cost of the current production of Trips in a month. What is the average cost to
produce a trip?
5. State the law of diminishing returns. Does this production verify this characteristic? Give an
explanation.
Exercise 10

Assume the cost function is C(q)=4q2+16.

Calculate the following costs:

1. Variable cost
2. Fixed cost
3. Average cost
4. Average variable cost
5. Average fixed cost.

Exercise 11

Suppose an Transport utility has the following function for trips provided:
F ( L, K ) = K 1 / 2 L1 / 2
Moreover, the Transport Service Provider Company pays $4 per unit of capital and $1 per unit of
labor. Remember that a Transport Service Provider Company’s costs are determined by the fact that
it pays rK for its capital and wL for its labor.
1. Does this production function exhibit increasing, decreasing, or constant returns to scale?

2. What is the Marginal Rate of Technical Substitution (MRTS) for this Transport Service
Provider Company?

Exercise 12

Identify the returns to scale (increasing, constant, or decreasing) for the following production
functions.
a) Q = 50 K 2 L3

b) Q = 3K + 2 L (1 point)
1 1
c) Q=K 3
+ L 3 (1 point)

Exercise 13

The production function is Q – ALa Kb, where a > 0 and b > 0.

a) The marginal product of labor is MPL =
b) The marginal product of capital is MPK =
c) The marginal rate of technical substitution is MRTS = .

Exercise 14

The production function for a Bus company is Q = 24L5K5. In the short run, the Bus company has a
̅ = 121. The price of labor is $10 per unit, and the price of capital is $20
fixed amount of capital, 𝐾
per unit.

a) The short-run production function is Q = .

 b) The marginal product of labor is MPL= 5 . Show that the marginal product of labor diminishes
for all levels of labor usage.
c) Derive the short-run TVC, TFC, and TC functions.
d) Derive SMC, AVC, ATC, and AFC.

Exercise 15

For the production function in exercise 14:

a) Derive the efficient input-usage functions for labor and capital.

b) Derive the long-run cost functions: LTC, LAC, and LMC.
c) Graph the LAC and LMC curves.
d) What level of output is the minimum efficient scale of production (MES)?

Exercise 16

a) Draw the marginal-cost and average-total-cost curves for a typical Transport Service Provider
Company. Explain why the curves have the shapes that they do and why they cross where they do.

b) Define economies of scale and explain why they might arise. Define diseconomies of scale and explain
why they might arise.

Exercise 17
Consider the following table of long-run total costs for three different Transport Service Provider Companies
(TSPC):

Quantity 1 2 3 4 5 6 7
TSPC A $60 $70 $80 $90 $100 $110 $120
TSPC B 11 24 39 56 75 96 119
TSPC C 21 34 49 66 85 106 129

Does each of these Transport Service Provider Companies (TSPC) experience economies of scale or
diseconomies of scale?