Economics 260OC: Assignment #2

Due October 24, 2023 by 5:00 pm

Instructor: Dr. Olivia Mesta
1. You may work together answering this assignment, but your
submitted assignment must be your own work. Any
explanations must be in your own words.
2. Answer the following questions being sure to SHOW YOUR
WORK and explain briefly what you are doing. Marks are
indicated in the square brackets. No marks if work is not
fully shown.
3. Please submit your assignment into the drop box as a single
file in PDF format. It is your responsibility to make sure that
you submit one file that is easy to read for marking purposes.
The drop box is instructed to allow one file for submission and
to keep only the most recent submission. Earlier submissions
will be disregarded. You can scan your hand written solutions to
a single pdf file. To ensure your scanned documentation is clear,
you can take pictures of your solutions and save as a pdf file.
Microsoft Office Lens is an app that can be installed on your
phone or tablet free of charge. You might find other apps that
can be used as well. Make sure that your file is readable and
submit it before the drop box closes at 5:00 pm.
4. Please submit your completed assignment to the correct
folder in the dropbox in MyLearningSpace by 5:00 p.m. on the
due date. Late assignments are subject to late penalties
according to the schedule listed on the course outline.
5. Assignment sent via e-mail is NOT accepted under any
circumstance.
6. If you have any questions, please send me an email directly at
omesta@wlu.ca rather than using MYLS e-mail platform.

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Question 1.
An electronics plant’s production function is Q =15KL, where Q is its output, L is the
amount of labor it uses per period, and K is the amount of capital it uses per period. The
price of labor is $18 per unit of labor, and the price of capital is $25 per unit of capital. The
firm’s vice president for manufacturing hires you to determine which optimal combination
of inputs the plant should use to produce 18,750 units of output per period.
a. What advice would you give him for the optimal amounts of K and L? (Round optimal L
to the nearest integer.) [5 marks]
b. Suppose the price of labor increases to $20 per unit. What effect will this have on output
per unit of labor? Calculate. (Round optimal K and L to the nearest integer.) [7 marks]
c. Is this plant subject to decreasing returns to scale? Why or why not? [3 marks]

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Question 2.
In the Green Grape Company, the relationship between output (Q) and the number of hours
of skilled labor (S) and unskilled labor (U) is
Q= 350𝑆𝑆 + 220𝑈𝑈 − 0.24𝑆𝑆 2 − 0.3𝑈𝑈 2
The hourly wage of skilled labor is $20, and the hourly wage of unskilled labor is $4. The
firm can hire as much labor as it wants at these wage rates.
a. Green Grape’s chief engineer recommends that the firm hire 414 hours of skilled labor
and 320.08 hours of unskilled labor. Evaluate this recommendation. Is it correct? Why?
Show your calculations to earn full marks. [6 marks]
b. If the Green Grape Company decides to spend a total of $20,350 on skilled and unskilled
labor, how many hours of each type of labor should it hire? [4 marks]
c. If the price of a unit of output is $10 (and does not vary with output level), how many
hours of unskilled labor should the company hire? (Note that we no longer assume that a
total of $20,350 is spent on labour. Thus, the answer is different than that in part b) [4
marks]

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Question 3.
The Bellmont Company produces two joint products, X and Y. The isocost curve corresponding to
a total cost of $63,000 is
𝑄𝑄𝑌𝑌 = 514 − 32𝑄𝑄𝑋𝑋 − 2𝑄𝑄𝑋𝑋2
where 𝑄𝑄𝑌𝑌 is the quantity of product Y produced by the firm and 𝑄𝑄𝑋𝑋 is the quantity of product X
produced. The price of product X is $448 and the price of product Y is $8.

a. If the optimal output combination lies on this isocost curve, what is the optimal output of
product X? [6 marks]

b. What is the optimal output of product Y? [2 marks]

c. Can you be sure that the optimal output combination lies on this isocost curve? Why or
why not? [2 marks]

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Question 4. The Yellow Company is a member of the lamp industry, which is perfectly
competitive. The price of a lamp is $90. The firm’s total cost function is
𝑇𝑇𝑇𝑇 = 1380 + 30𝑄𝑄 + 5𝑄𝑄 2 , where TC is total cost (in dollars) and Q is hourly output.
a. What output maximizes profit? [3 marks]
b. What is the firm’s economic profit at this output? [3 marks]
c. What is the firm’s average cost at this output? [2 marks]
d. If other firms in the lamp industry have the same cost function as this firm, is the industry in
equilibrium? Why or why not? [2 marks]

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Question 5.
In 2010, the binder industry was perfectly competitive. The market demand curve for
binders was:
QD = 3252-40P
where P was the price of a binder (in dollars per binder) and QD was the quantity of
binders demanded per month. The market supply curve for binders was:
QS = 212+120P
where QS was the quantity of binders supplied per month.

a) Solve for the short run equilibrium price and output of binders (show your work). [4
marks]

b) If a representative binder seller has long-run total cost given by: TC = 1 + 2q + 0.0625q 2
where q is the monthly output of the individual binder seller, what is the long-run, profit
maximizing level of output of this firm? Explain your answer. Hint: In the long run, firms
produce where ATC is at a minimum. [4 marks]
c) What is the long-run equilibrium price charged in the market for binders? [2 marks]

d) What is the long-run equilibrium output of the binder industry? [2 marks] (Hint:
Assume that the firms will meet the demand at the long run price.)

e) Approximately how many binder sellers will there be in the long-run equilibrium?
[2 marks]

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Question 6.
The demand for good X is given as P=40-4Q. Firm A is a monopolist producing good X with
the following total cost function: TC=80+4Q+0.5𝑄𝑄 2 . Suppose the government is considering
deregulating this market in order to make the market for good X perfectly competitive.
a) What is the equilibrium output and price when firm A acts as a monopolist? [4 marks]
b) What is consumer surplus and producer surplus when firm A acts as a monopolist? Show
your work. [6 marks]
c) What is the equilibrium output and price if the government makes this market perfectly
competitive? (Round your final answer to two decimal places) [2 marks]
d) What is consumer surplus and producer surplus when the market is perfectly competitive?
Show your work. [4 marks]
e) How much does social welfare (i.e., total surplus) increase when the market moves
monopoly to perfect competition? Explain your answer. [2 marks]

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Question 7.
The Deering Manufacturing Company’s short- run average cost function in 2012 was
AC = 23 + 6Q
where AC is the firm’s average cost (in dollars per pound of the product), and Q is its
output rate.
a. Obtain an equation for the firm’s short- run total cost function. [4 marks]
b. Does the firm have any fixed costs? Explain. [2 marks]
c. If the price of the Deering Manufacturing Company’s product (per pound) is $23, is the
firm making profit or loss when producing a positive quantity? Explain what the firm
should do at $23 price in the short run. [6 marks]
d. Derive an equation for the firm’s marginal cost function. [3 marks]

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