1. To increase revenue and profit, a firm is considering a 4% increase in price and an 11% increase in advertising. If the price elasticity of demand is -1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenue? Explain.
2. Between 2011 and 2012, the quantity of cars produced and sold decreased by 20%. During the same period, the price of cars increased by 5% and the cost of gasoline increased by 20%. We know that the cross elasticity of demand of gasoline is -0.3. Compute the impact of the gasoline price increase on the demand for cars.
3. Between 2011 and 2012, the quantity of cars produced and sold decreased by 20%. During the same period, the price of cars increased by 5% and the cost of gasoline increased by 20%. We know that the cross elasticity of demand of gasoline is -0.3.
Compute the price elasticity of demand for cars during this period.
4. A firm has the following short-run production function (where L = Labor and Q = Output):
Q = 10L - 0.5L2
Suppose that the output can be sold for $10 per unit. Further assume that the firm can obtain as much of the variable input (L) as it needs at $20 per unit.
a) Determine the marginal revenue function
b) Determine the value of L that maximizes profits
5. A company uses two variable inputs, labor (L) and materials (M), to produce its output. At the company's current level of output:
CL = $10 / unit MPL = 25
CM = $2 / unit MPM = 4
a) Determine whether the firm is operating efficiently, given that its objective is to minimize the cost of producing the given the level of output
b) Determine what changes (if any) in the relative proportions of labor and materials are needed to operate efficiently
6.A company has a cost structure described in the table below. Using your knowledge of the types of costs involved in a production process, fill in the blanks in the table.
|
Quantity produced
|
Total Cost
|
Total Fixed Cost
|
Total Variable Cost
|
Average Total Cost
|
Average Fixed Cost
|
Average Variable Cost
|
Marginal Cost
|
|
0
|
100
|
|
0
|
-
|
-
|
-
|
-
|
|
1
|
|
|
|
160
|
|
|
|
|
2
|
|
|
80
|
|
|
|
|
|
3
|
|
|
|
65
|
|
|
|
|
4
|
|
|
|
|
|
|
10
|
|
5
|
|
|
120
|
|
|
|
|
|
6
|
|
|
|
40
|
|
|
|
|
7
|
|
|
180
|
|
|
|
|
|
8
|
|
|
|
|
|
30
|
|
|
9
|
421
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
100
|
|
|
|
|