ECN 100A A01 SQ 2020 !"

Virginia Cui ጱ MT 2: 100 A

(A) ᕮຎ

ྌၥḵጱړහғ 36҅ჿړ 72 ړ

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8 / 16 ړᳯ᷌ 1

FOR THIS QUESTION ENTER NUMERICAL (E.G. 10,

not "ten") VALUES IN EACH BLANK.

You are considering investing in a new alternative fuel

technology called Snake Oil that converts snake

venom into transportation fuel. The cost function of

Snake Oil is C(q) = 64 - 6q + q where q is in barrels of

oil. From a consumer perspective Snake Oil is identical

to conventional oil, so in order to sell snake oil you will

have to sell it at the competitive world oil price of $14

per barrel.

Part 1. You have yet to enter this market, how much

Snake Oil should you produce? You will produce

8 barrels of Snake Oil.

Part 2. Now assume that California is concerned

about the welfare of snakes and charges a one time

license fee of 80 to anyone entering the Snake Oil

business, The oil price is still $14 a barrel. With this

fee in place, now how much Snake Oil will you

produce? You will produce 12

barrels of Snake Oil.

Now assume that Snake Oil is NOT identical to regular

oil. In fact it does all sorts of good things for the

environment and your car, but requires a special type

of car, such as the Chrysler Sidewinder. This means

that the Snake Oil market is distinct from the regular

oil market. The demand curve for Snake oil is

estimated to be D(p) = 880-8p. Also assume there is

NO LICENSE FEE for Parts 3 and 4.

Part 3. The Long-run price of Snake Oil will be $

10 .

Part 4. There will be 100 firms in the

Snake Oil market in the long-run, given the market

demand of D(p) =880 - 8p.

2

8૪ࢧᒼ

10 ྋᏟࢧᒼ

q = 10 ྋᏟࢧᒼ

ten ྋᏟࢧᒼ

Ten ྋᏟࢧᒼ

q=10 ྋᏟࢧᒼ

12૪ࢧᒼ

zero ྋᏟࢧᒼ

0 ྋᏟࢧᒼ

Zero ྋᏟࢧᒼ

q=0 ྋᏟࢧᒼ

q=0 ྋᏟࢧᒼ

10

ten ྋᏟࢧᒼ

Ten ྋᏟࢧᒼ

$10 ྋᏟࢧᒼ

100

one hundred ྋᏟࢧᒼ

hundred ྋᏟࢧᒼ

One hundred ྋᏟࢧᒼ

Part 1: need to check both output and entry

rule. Output rule says set MC = p or in this

case set MC = -6+ 2q = p = 14. This leads to q*

=10 BUT need to check that Long run AC > p

as well. AC(10) = 64/10 - 6 + 10. This is < 14

so WILL ENTER and q = 10.

Part 2: MC is unchanged so q* = 9. Now AC(9)

= 64/9 -10 + 9 = 6.11 < p = 9. So with the

subsidy we will enter and make q = 9.

Part 3: LR price will be where LRAC = MC with

the subsidy. This means set

AC(q) = 64/q -6+ q = MC(q) = - 6 + 2q; or 64/q =

q or q = 8. This is the LR quantity, the LR price

will set LRAC(8) = MC(8) = 10. So the LR price

10.

Part 4: The number of firms in this market

need to meet demand with each firm produce

q = 8. At a price of 6 there is demand of 880 -

8*10 = 800. Since each firm is producing 8 that

means 100 firms.

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8 / 16 ړᳯ᷌ 2

At Hilltop, after the zombie apocalypse has caused

the fall of civilization, Jesus has invented a new way to

generate electricity. It involves paying workers to

walk around in circles tied to a generator. Workers

make w = $10 per hour. The production function is q

= (1/2)KL, , as long as there is at least 1 machine, where

K is the amount of machine-hours and L is the amount

of worker hours

Parts 1 and 2. Using an optimal mix of inputs, Jesus

can currently produce 320 kWh of electricity using

160 worker/hours of labor at a total cost of $3200.

Given these facts, we can conclude that Jesus's

machine costs r = $ [ೠ] /

per hour. We can also conclude that Jesus's

electricity system exhibits

[ೠ] returns to scale.

Now assume that Neegan has devised a new machine

that can use "walkers" (e.g. zombies) instead of living

workers. The production function is the same as

Jesus's, q = (1/2) KL, as long as there is at least 1

machine, and now "labor" is provided by the walking

dead, who do not need to be compensated, so w = 0.

However, Neegan's machine costs three times as

much per hour as Jesus's machine, and the demand

for electricity at the Sanctuary, where Neegan lives, is

twice as high, or 1280 kWh.

Parts 3 and 4. Given these facts, we can conclude that

Neegan would produce 1280 KWh at a higher total

cost than Jesus's machine. Neegan's electricity

system exhibits diseconomies of scale .

400

increasing

higher total cost ૪ࢧᒼ

lower average cost ྋᏟࢧᒼ

diseconomies of scale ૪ࢧᒼ

economies of scale ྋᏟࢧᒼ

Note that q = (1/2) KL = 320. In the first

machine L = 160 so K must be 320/(1/2)L =

640/160 = 4. If the total cost is $3200 and

160x10 = 1600 is being spent on labor, then

the cost of capital must be 3200 - 1600 =

1600. So the price of capital must be 1600/4 =

400.

If you double K and L, you more than double

output so this exhibits INCREASING RTS.

At the Sanctuary, the cost of the machine is 3 x

400 but labor is free, so the best combination

of inputs would be to buy the minimum 1

machine and use free labor for the rest. That

means the production costs are all fixed, and

marginal costs are zero. Total cost to produce

any amount of electricity is 1200, which is less

than at Hilltop. This is extremely large

economies of scale.

4 / 4 ړᳯ᷌ 3

The above figure shows 2 different Isoquants for a

production process. Which of the following can

definitely be concluded from this figure?

Capital and Labor are perfect substitutes.

The process exhibits decreasing returns to scale.

The marginal product of capital is greater than the

marginal product of labor ( ).

None of the alternatives.

A constant slope would indicates perfect

substitutes, and this slope is not constant. The

convex shape of the isoquant implies that

there are parts where MPK is smaller than

MPL (small slope). Last, the picture shows that

the bundle (50,50) lies above the q = 100

isoquant, while the bundle (100,100) falls on

the q = 200. This means a bundle smaller than

(50,50) produced q = 100 and that doubling

that bundle would not reach q = 200. So the

process has decreasing RTS.

0 / 4 ړᳯ᷌ 4

Ashby lumber company has the following production

function

q= 20L - 2L2

where q is the number of trees processed and L is the

quantity of labor Ashby employs.

For what values of L is the MP diminishing?

L > 20

L < 5

L > 5 ૪ࢧᒼ

L > 0 ྋᏟࢧᒼ

MPL = dq/dL = 20-4L

This is at its maximum when L = 0 and declines

for all L > 0.

0 / 4 ړᳯ᷌ 5

Lectures in microeconomics can be delivered either

by an instructor (labor) or a movie (capital) or any

combination of both. Yet the it gets harder and harder

to substitute more movies for an instructor the more

movies are already used. Which graph in the above

figure best represents the isoquants for lectures in

microeconomics when capital per day is on the

vertical axis and labor per day is on the horizontal

axis?

Graph A

Graph C

Graph D ૪ࢧᒼ

Graph B ྋᏟࢧᒼ

0 / 4 ړᳯ᷌ 6

If we use only wood and glue to make bookcases and

we always have to use them in fixed proportions.

Headquarters has ordered us to produce 100

bookcases. Which of the following would affect the

optimal amount of wood used in the production of

100 bookcases?

The price of wood

None of these ྋᏟࢧᒼ

The price of glue

All of these.

The price of bookcases ૪ࢧᒼ

For fixed proportions, we get L-shaped

isoquants. The optimal bundle will actually not

depend upon the price of wood or glue

because we need them both no matter what

they cost. Similarly if we have to hit the 100

isoquant the price of bookcases is not

relevant, although if the price is too low,

headquarters may regret ordering up 100

cases to be produced.

0 / 4 ړᳯ᷌ 7

If capital is fixed in the short run and labor is variable,

increasing the price of labor will __________. (Assume

that before and after the price change the firm finds it

optimal to produce

a positive quantity of output.):

Increase the firm's marginal cost. ྋᏟࢧᒼ

Lead the firm to use more capital in the short run.

Lead the firm to use less capital in the long-run.

None of these. ૪ࢧᒼ

The price of the variable input will affect a

firm’s marginal cost in the short run but not

the optimal level of the fixed input.

0 / 4 ړᳯ᷌ 8

During the middle ages, the production function for

books was q = 3k + 2L where k was the number of

printing presses and L was the number of monk-hours

of labor writing by hand. If the rental rate of printing

presses was r = $10 and the wages (in terms of food

and lodging) for monks was w = $5, then the cost

function of books was

TC(q) = (r/3) * q = (10/3) * q

TC(q) = (w*2)*q = (5*2)*q

TC(q) = (r/3 + w/2) * q = (10/3 + 5/2) * q

TC(q) = (w/2)*q = (5/2)*q ྋᏟࢧᒼ

TC(q) = (3*r + 2*w)*q = (3*10 + 2*5)*q ૪ࢧᒼ

Given that printing presses are less than twice

as productive as monks, and were twice as

expensive as monks, the least cost mix is to use

all monks. One would get 2 books per hour

from a unit of labor, so you would need only

1/2 of an hour at $w per hour to produce each

book. So TC(q) = w/2 * q.

4 / 4 ړᳯ᷌ 9

The University of California's Office of the President

recently completed a new $50 million building in

downtown Oakland to house systemwide

administrators. Due to the coronavirus crisis, half

those administrators are now laid off. The UC could

have the remaining administrators work from home

with no drop in productivity, or given the extra space,

could have them work at the new building safely.

Oakland based Clorox is offering to buy the building

for $5 million. The sunk cost to UC of using the

building is

$55 million.

$5 million.

zero.

$45 million.

$50 million.

4 / 4 ړᳯ᷌ 10

You are the new manager at Upper Crust Bakery in

Davis. Assume that the cost function for making

Ciabbata loaves at Upper Crust Baker is C(q) = 30 - 3q

+ (1/24) q . If the price of loaves is 5 then how many

loaves would you have Upper Crust produce?

3

11.09

none of these

9.38

8

64

Set q such that MC = p = 5.

MC = -3+ 1/8 q = 5, therefore 8 * 8 = q .

So q = 8. Now need to check that we don't shut

down, or

is AVC < p?

AVC = -3 + 1/24 q = 8/3 - 3 < 0 so definitely

keep operating at q = 8.

2 2

2

4 / 4 ړᳯ᷌ 11

Each of the diagrams above traces out 3 Isoquants for

a particular production process. Which picture is

consistent with Capital and Labor being perfect

substitutes for all values of L and K?

Diagram B

Diagram D

Diagram C

Diagram A

None of these

A constant MRTS - or Isoquant slope, is one

definition of perfect substitutes. Note that

figure A has areas where slopes are constant

but also areas where the slope is zero.

4 / 4 ړᳯ᷌ 12

Hipster Dave is a high-power consultant who makes

$100 an hour in consulting fees. He is also into new

technology and he has leased a Hindenburg, the

new hydrogen power vehicle made by VolksWagen.

Because hydrogen is still a new technology, VW

makes the fuel available for free to Hipster Dave.

Dave also has a VW Passat, which is the same kind of

car as the Hindenburg, but uses regular gasoline.

Unfortunately, a supply disruption has limited the

number of available hydrogen fueling stations, and

Hipster Dave now has to drive two hours to Oakland,

California in order to refuel his Hindenburg. He lives

next door to a gas station and refueling his Passat

takes no time, but costs $50 to refill his tank.

Hipster Dave says, "its a pain to have to drive to

Oakland, but the fuel is free so I'm willing to do it to

save the money." However, every time he fills his

tank, Hipster Dave is incurring roughly $150 in

[word_answer] costs.

opportunity

ྋᏟᒼໜ Opportunity

opportunity cost

oportunity

opportunity

Oportunity

Opportunity cost

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