Producer Behavior and Costs
1 Town workers occasionally use their own automobiles on
official business The currentreimbursement rate is $25 per mile The
employees’ union complains to the town manager thatnumerous studies show that
the cost of operating an automobile is really $50 per mile, so that the
current rate is too low The manager notes that workers seem delighted when
they have an excuse to use their own cars and get reimbursed at a
“measly” $25 per mile Assuming that both the union and the
management are factually correct, explain this situation
2 Farmers currently use 50 units of capital and 25 hours of
labor to harvest an acre of tomatoes Capital costs $200 per unit and labor
costs $500 per hour, so the total cost is 50(2) + 25(500) = $22500 per acre
The minimum wage is increased to $575 per hour The Labor Department estimates
that costs will rise by 25(575 – 500) = $1875, to $24375 per acre Is that
likely to be an over or underestimate? Are there conditions when it will be
exactly right?
3 A firm has two plants, each with different marginal cost
curves Suppose plant 1 has MC = 1Q and plant 2 has MC = 1 + 05Q Imagine
that they want to produce Q = 100 How much would it produce at each plant?
4 On your last vacation to sunny Elko, Nevada you noticed
that the casinos had $100 and $005 slot machines You ask the casino owner
which machine is more profitable and he assures you that on average they make
more off the $100 machines than the $005 Why does the casino keep the $005 machines around? Would they be better off to replace the
$005 machines with $100 machines? Assume that the $100 slot machine costs as
much as the $005 slot machine for the casino owner to purchase (Hint: is the average revenue the relevant
measure?)
5 Suppose that a firm has $100 in fixed costs and has
constant marginal costs of $10
a) Graph this firm’s MC, AC, AFC, and AVC curves
b) What is the minimum efficient scale of production for
this firm?
c) How many firms will operate in this industry?