Managerial Economics

Second Evaluation
In-class Test
Marks: 20

1. The Oceanic Pacific fleet has just decided to use a pole-and-line method of fishing instead
of gill netting to catch tuna. The latter method involves the use of miles of nets strung out
across the ocean and therefore entraps other sea creatures besides tuna (e.g., porpoises, sea
turtles). Concern for endangered species was one reason for this decision, but perhaps more
important was the fact that the major tuna canneries in the United States will no longer accept
tuna caught by gill netting.
Oceanic Pacific decided to conduct a series of experiments to determine the amount of tuna
that could be caught with different crew sizes. The results of these experiments follow.

a. Determine the point at which diminishing returns occurs.

b. Indicate the points that delineate the three stages of production.
c. Suppose the market price of tuna is $3.50/pound. How many fishermen should the company
use if the daily wage rate is $100?
d. Suppose a glut in the market for tuna causes the price to fall to $2.75/pound. What effect
would this have on the number of fishermen used per boat? Suppose the price rose to
$5.00/pound. What effect would this have on its hiring decision?
e. Suppose the firm realizes that to keep up with the demand for tuna caught by the more
humane pole-and-line method of fishing, each of its boats must catch at least 1,000 pounds of
fish per day. Given the preceding data, what should it consider doing? Explain.
2. The data in the table below give information about the price (in dollars) for which a firm
can sell a unit of output and the total cost of production.
a. Fill in the blanks in the table.

b. Show what happens to the firm’s output choice and profit if the price of the product falls
from $60 to $50.
c. Derive the firm’s short-run supply curve. And calculate various unit costs for each level of
output.
d. If 100 identical firms are in the market, what is the industry supply curve?

3. Kate’s Katering provides catered meals, and the catered meals industry is perfectly
competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost
consists of the wages paid to the cooks and the food ingredients. The variable cost per day
associated with each level of output is given in the accompanying table.
Quantity of Meals Variable Cost
0 0
10 200
20 300
30 480
40 700
50 1000
a. Calculate the total cost, the average variable cost, the average total cost, and the marginal
cost for each quantity of output.
b. What is the break-even price? What is the shut-down price?
c. Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run,
will Kate earn a profit? In the short run, should she produce or shut down?
d. Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run,
will Kate earn a profit? In the short run, should she produce or shut down?
e. Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run,
will Kate earn a profit? In the short run, should she produce or shut down?

4. (a) The menu at Joe’s coffee shop consists of a variety of coffee drinks, pastries, and sandwiches.
The marginal product of an additional worker can be defined as the number of customers who can be
served by that worker in a given time period. Joe has been employing one worker, but is considering
hiring a second and a third. Explain why the marginal product of the second and third workers might
be higher than the first. Why might you expect the marginal product of additional workers to diminish
eventually?

4. (b) 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:

No. of Workers No. 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.

5. Suppose you are thinking about starting a lawn service in your area. The lawn service market
can be considered perfectly competitive. You own a $200 lawnmower. You have a fixed cost
of $90 (maintenance costs on the mower, etc.). Your variable costs are as follows:

Quantity Total Variable Cost Total Cost

1 5 95
2 15
3 30
4 50
5 75
6 105
7 140
8 180
9 225
10 275
a) Calculate total costs, average total costs, average variable costs, and marginal costs.
b) Suppose that the going rate for lawns is $35 per lawn. How many lawns would you mow?
c) Calculate your producer surplus, and your profit. Are you earning economic profit?
d) How would your production decision change if the price fell to $20 per lawn?
e) Sketch out your supply curve for lawns.

6. A publisher faces the following demand schedule for the next novel from one of its popular
authors:

Quantity Total Cost

100 0
90 100,000
80 200,000
70 300.000
60 400,000
50 500,000
40 600,000
30 700,000
20 800,000
10 900,000
0 1,000,000

The author is paid $2 million to write the book, and the marginal cost of publishing the book
is a constant $10 per book.
a. Compute total revenue, total cost, and profit at each quantity. What quantity would a profit-
maximizing publisher choose? What price would it charge?
b. Compute marginal revenue. (Recall that MR 5 ΔTR/ΔQ.) How does marginal revenue
compare to the price? Explain.
c. Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do the
marginal-revenue and marginal cost curves cross? What does this signify?
d. In your graph, shade in the deadweight loss. Explain in words what this means.
e. If the author were paid $3 million instead of $2 million to write the book, how would this
affect the publisher’s decision regarding what price to charge? Explain.
f. Suppose the publisher was not profit-maximizing but was concerned with maximizing
economic efficiency. What price would it charge for the book? How much profit would it make
at this price?