Economic Week 3 Homework Assignment

Due Wednesday May 24 2017. Understanding production costs is a critically important concept for managers. In the short run, managers must consider variable costs and fixed costs. Based on your study and your experience, comment on how fixed costs affect decision making in the short run. Provide some examples to support your answer. Be sure to properly cite any sources in APA format. Strong initial post should be around 200-250 words.

Due Saturday, May 27 2017 TQ#1.The following table shows data for a simple production function.

Capital (K) Labor (L) Total Product (TP) Average Product (AP) Marginal product (MP)

10 0 0 – –

10 1 5

10 2 15

10 3 30

10 4 50

10 5 75

10 6 85

10 7 90

10 8 92

10 9 92

10 10 90

A. From the information in the table, calculate marginal and average products.

B. Graph the three functions (put total product on one graph and marginal and average products on another).

C. For what range of output does this function have diminishing marginal returns.

D. At what output is average product maximized?

TQ#3. Jim is considering quitting his job and using his savings to start a small business. He expects that his cost will consist of a lease on the building, inventory, wages for two workers, electricity ,and insurance. a. identify which costs are explicit are which are opportunity(implicit)cost. b. identify which costs are fixed and which are variable.

TQ#4. Jill resigns from her job, at which she was earning $50,000 per year, and uses her $100,000 savings, on which she was earning 5 percent interest, to start a business. In the first year, she earns revenue of $150,000, and her costs are as follows.

Rent $25,000 Utilities $12,000 Wages $30,000 Materials $20,000

A. Calculate Jill’s accounting profit. B. Calculate Jill’s economic profit.

TQ#5. The following table shows data for the simple production function used in Question1. Capital costs the firm $20 per unit, and labor costs $10 per worker.

K L TP TFC TVC TC AFC AVC ATC MC 10 0 0 10 1 5 10 2 15 10 3 30 10 4 50 10 5 75 10 6 85 10 7 90 10 8 92

a. From the information in the table, calculate total fixed cost (TFC), TVC, TC, AFC, AVC, ATC, MC

b. Graph your results, putting TFC, TVC, and TC on one graph and AFC, AVC, ATC, and MC on another

c. At what point is average total cost minimized? At what point is average variable cost minimized?

AQ#2. The following information is about pharmaceutical manufacturing. The Food and Drug Administration (FDA) has concluded that the pharmaceutical industry needs to adopt manufacturing innovations, partly to raise quality standards. In other industries, manufacturers constantly change their production lines to find improvements. But FDA regulations leave drug-manufacturing processes virtually frozen in time. As part of the drug-approval process, a company’s detailed manufacturing plan—and even the factory itself—must obtain FDA approval. After approval, even a tiny change in how a drug is produced requires another round of FDA review and authorization that involves time and paperwork. Quality testing is done by hand. Computerized equipment and robots are not used as commonly as in other high-tech industries. Most pharmaceuticals are made according to recipes that involve many separate steps. Each step produces an intermediate batch of chemicals that must be stored, sometimes for long periods. Only then can the process move on to the next step. Gauging the dryness of a batch requires a technician to stop a dryer, break a vacuum seal, and pluck a sample by hand for testing in a specialized laboratory. Before the concoction can move on, a worker might have to wait hours for test results. Under the old system for testing for bacterial contamination, a scientist looked for contamination by peering through a microscope to count colonies of organisms in a petri dish. a. Describe how diminishing returns are likely to set in for the pharmaceutical production process. b. Why do you think the FDA allowed firms to maintain these types of production processes?

AQ#3. The following discussion describes a new inventory system used by J. C. Penney39: In an industry where the goal is rapid turnaround of merchandise, J.C. Penney stores now hold almost no extra inventory of house-brand shirts. Less than a decade ago, Penney would have stored thousands of them in warehouses across the U.S., tying up capital and slowly going out of style. The entire program is designed and operated by TAL Apparel Ltd., a closely held Hong Kong shirt maker. TAL collects point-of-sale data for Penney’s shirts directly from its stores in North America for analysis through a computer model it designed. The Hong Kong company then decides how many shirts to make, and in what styles, colors, and sizes. The manufacturer sends the shirts directly to each Penney store, bypassing the retailer’s warehouses and corporate decision makers. a. Discuss how this case illustrates the concept of the opportunity cost of capital. b. How does this innovation also help in demand management?

TQ#1. A company operates plants in both the united states(where capital is relatively cheap and labor is relatively expensive) and Mexico(where labor is relatively cheap and capital is relatively expensive).

A. Why is it unlikely that the cost-minimizing factor choice will be identical between the two plants?

B. Under what circumstances will the input choice be relatively similar?

AQ#1. Discuss how the examples in the opening case show how the choices facing a firm making a long run decision on plant location are much greater than those for a firm with a plant already in operation. Why is the long run considered to be a planning horizon?

AQ#4. The following quotation appeared in a Wall Street Journal article on the battle for market share in the automobile industry in 2000: “The huge fixed costs involved in developing new vehicles and running big auto factories means auto makers feel compelled to maintain, or expand, market share. Losing share long term could mean shutting down factories, or running factories at unprofitable rates.” Do these statements support economic theory and show that economies of scale do not benefit a firm if the output level is small? Explain.

AQ#5. A 1964 study of the broiler chicken processing industry showed that decreased continually with output size but after 10 million birds per year the decrease was small. Researchers concluded from the study that an output of 10 million birds per year, representing 0.33 percent of 1969 broiler production, captured most of the efficiencies. A more recent study concluded that a technically efficient and cost-effective processing plant should process 8,400 birds per hour. Expanding this processing rate to an annual production volume results in an estimated MES [minimum efficient scale] value of 0.4 percent of the market. Do these results show that competition among a large number of plants and firms in the broiler chicken industry is possible? Explain.

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