1. 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
2. Peter Higgins is a sales agent for XZY Company. He has an effort cost function of C = e2 and a reservation wage of $1,500. His wage package is W = 1,500 + 0.2Q where the CEO sets the incentive at 0.2 and Q = 200e. Q is the output. If the CEO increases the incentive from 0.2 to 0.25, what happens to the Peter's effort? Will profits rise or fall?
3. Two consumers Justin and Cindy of the same product have the following demand curves: Q1 = 500 - 10 P and Q2 = 500 - 20 P. The marginal cost (MC) for the firm is $10. Calculate the prices when the firm discriminates between the two consumers. Is this a good strategy, or should the firm charge the same price to both of them?
4. Some years ago, conservation groups paid cattlemen in the Western United States to move their herds away from wild buffalo herds so that the buffalo would have more feed and would not have to compete with the cattle. What is the relevance of the Coase Theorem in this case?