Assignment:
Please EXPLAIN all your answers.
A. The RH Snippet company has one president and 1000 assembly line workers.
Which of the following events would have a bigger impact on the price of Snippets and why?
1. The president gets a raise of $1,000,000 a year.
2. A new union contract raises each worker's wages by $1,000 a year, but allows the firm to fire as many workers as it wants to.
B. Bob Thomason produces theorems using hours of labor and Big Machines. In the short run, his labor is a variable factor but the number of Big Machines is fixed. When he works for L hours using M Big Machines, Bob can produce L⋅M theorems. There are only 3 Big Machines in the world, and they can only be rented in whole number quantities (you can not employ 1/2 of a Big Machine). Bob's time is worth $1 per hour, and it costs $1 per hour to rent a Big Machine.
3. Draw Bob's short run total cost curve on the assumption that he employs 1 Big Machine. Do the same on the assumption that he employs 2 Big Machines. Do the same on the assumption that he employs 3 Big Machines.
4. Draw Bob's long run total cost curve.
5. Repeat question 3 and 4 with "total cost" replaced by "average cost."
6. Repeat question 3 and 4 with "total cost" replaced by "marginal cost."
C. Suppose that a firm experiences constant returns to scale at all levels of output.
7. True or False: Whenever the firm increases its use of inputs, its output expands proportionately. Thus this firm never experiences diminishing marginal product of labor.
D. Suppose that wheat is purchased only by poor people. Their demand for wheat is given by the following schedule:
Price Quantity
$1 per bushel 10 bushels
2 8
3 7
4 5
Now suppose that in the spirit of Christmas, a coalition of rich people decide to buy wheat and resell it to poor people for half of whatever the rich people have to pay.
8. List some points on the new demand curve for wheat.
9. Suppose that the rich announce their plan just before Christmas, and suppose that in the short run, the supply of wheat is fixed at 7 bushels. (That is, the supply curve for wheat is vertical at 7.) How much do poor people benefit from the generosity of the rich?
10. Suppose instead that the rich announce their plan a year in advance, and suppose that wheat is supplied by a competitive constant-cost industry. Is this better or worse for poor people than if the rich had made a last-minute announcement as in question 9?