ID:＿＿＿＿＿＿＿
Name:＿＿＿＿＿＿＿＿
Due day: 2014.1.3
Homework #4
Economics (I) ECON100103
Part I. Multiple Choices: 50% (5% each)
Please check out the questions via your e-mail and fill your answers in below blanks.
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Part II. Problems: 50%
1. Use the following graph to answer the following questions.
a. If the wage rate and the rental price of machines are both $50 and total cost is $800, is the
cost-minimizing point A, B, or C? And explain your answer.
b. If the wage rate is $40, the rental price of equipment is $120, and total cost is $1,200, is the
cost-minimizing point A, B, or C? And explain your answer.
c. If the wage rate is $60, the rental price of equipment is $90, and total cost is $1,800, is the
cost-minimizing point A, B, or C? And explain your answer.
ANSWER:
A.
If total cost is $800 and the wage rate and rental price of machines both equal $50, the isocost line's endpoints are
at 16 and 16. Along this isocost line, the cost minimizing point for producing 6,000 units is at point A
B.
If the wage rate is one-third the rental price of machines, we must be on the isocost line whose endpoints are
where capital = 10 and labor = 30, because we can buy three times as much labor with a total cost of $1,200. Along this
isocost line the cost-minimizing point for producing 6,000 units is point B
C.
If the wage rate is two-thirds the rental price of machines, we must be on the isocost line whose endpoints are
where capital = 20 and labor = 30, because we can buy three times as much labor with a total cost of $1,800. Along this
isocost line the cost-minimizing point for producing 14,000 units is point C
2. Refer to Figure 2. The figure above shows the cost curves of a perfectly competitive firm in the coffee
market. Use the graph in Figure 12-8 to answer the following questions. Assume the market price is $3
per pound.
Figure 2
a.
b.
c.
d.
What is the lowest price at which the coffee grower will supply output in the short run?
In the diagram draw the firm's demand curve (label this "MR" for marginal revenue).
What is the firm's profit-maximizing output?
Is the firm earning a profit or a loss? Identify the area in the graph that represents the firm's profit or
loss.
e. Explain how entry or exit will occur in the market to ensure that firms will break even in the long run.
ANSWER:
a.
b.
c.
d.
$1.50 per pound. This represents the lowest point on the AVC curve, or the shut-down point
E.
Above normal profits attract new entrants into the industry, which will shift the industry supply curve to the
See the figure below.
225. This is the output where price (MR) equals MC.
The firm is earning a profit. See the figure below.
right and decrease the market price. This entry stops when all economic profits are eliminated and price equals
average total cost