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Optimal Output and Marginal Product of Workers

Q-3 Input Factors
You have been hired to manage a small manufacturing facility which has cost and production data given in the table below.
Total Total
Workers Labor Cost Output Revenue
1 $500 100 $700
2 1000 280 1150
3 1500 440 1440
4 2000 540 1570
5 2500 600 1670
6 3000 630 1710
7 3500 640 1730
a. What is the marginal product of the second worker?
b. What is the marginal revenue product of the fourth worker? c. What is the marginal cost of the first worker?

Q-4 Optimal Output
Answer the next questions on the basis of the following cost data for a firm in pure competition:
OUTPUT ------ TFC ---------- TVC
0 $100.00 0.00
1 100.00 70.00
2 100.00 120.00
3 100.00 150.00
4 100.00 200.00
5 100.00 270.00
6 100.00 360.00
(a) Refer to the above data. If the product price is $25, at its optimal output will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations.
(b) Refer to the above data. If the product price is $55, at its optimal output will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations.

Q-5 Imperfect Competition
A software producer has fixed costs of $30,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below:
Q TVC Price
3,000 $ 5,000 $5
13,000 15,000 4
23,000 28,000 3
33,000 42,000 2
43,000 70,000 1
a. If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work.)
b. What should be the production level if fixed costs rose to $50,000 per month? Explain.

Q-7 Fiscal Policy
a. Suppose your local congress representative suggests that the federal government intervene in the gasoline market to stop runaway price increases. Would you say that this view basically supports the Keynesian or the Monetarist school of thought? WHY? What position would the opposing school of thought take on this issue? (Be brief -- you can answer this in 2 or 3 brief paragraphs)
b. Any change in the economy's total expenditures would be expected to translate into a change in GDP that was larger than the initial change in spending. This phenomenon is known as the multiplier effect. Explain how the multiplier effect works.
c. You are told that 90 cents out of every extra dollar pumped into the economy goes toward consumption (as opposed to saving). Estimate the GDP impact of a positive change in government spending that equals $20 Billion.

Q-8 Money Creation and Monetary Policy
a. Third National Bank is fully loaned up with reserves of $30,000 and demand deposits equal to $100,000. The reserve ratio is 5 percent. Households deposit $20,000 in currency into the bank. How much excess reserves does the bank now have, and what is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.
b. What is the fed funds rate in the banking system, and explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.


Solution Preview

3. The marginal product of the second worker is the additional output he generates. Thus, we have 280-100=180. The marginal revenue product of the fourth worker is the increase in revenue that the firm receives from hiring the 4th worker. Thus we have 1570-1440= 130. The firm should continue to hire workers until the marginal revenue of each worker is less than marginal labor cost. This occurs when the firm hires the second worker. The worker costs the firm an additional $500, but only brings in $450 of additional revenue.

4. In the short run, a firm will continue to produce output as long as the marginal variable cost is less than the marginal revenue. It may not have a profit if the fixed costs are taken into account. Since marginal cost is never less than $25, the firm will produce an output of zero when the price is $25. Its economic loss will be $100. Since its marginal cost is less than $55 until the 5th unit, it will produce four units if the price if $55. Its revenue will be $220, and its loss will be $300-$220 = $80.

5. We can analyze the profit for each level of production by subtracting the TVC from the revenue (PQ):
3,000: 15,000-5000= 10000
13,000: 52000-15000=37000
23,000: 69000-28000=41000
33,000:66000-42000 = 24000
43,000: 43,000- 70,000=-27000

The firm will want to maximize its profits. The additional increase in cost of $30,000 will not affect this analysis, ...

Solution Summary

Production decisions, fiscal policy, and monetary policy questions are answered in 1019 words.