Economics Help

Topics: Costs, Economics, Variable cost Pages: 10 (1313 words) Published: March 9, 2011
1. Suppose that there are two states that do not trade: Iowa and Nebraska. Each state produces the same two goods: corn and wheat. For Iowa the opportunity cost of producing 1 bushel of wheat is 3 bushels of corn. For Nebraska the opportunity cost of producing 1 bushel of corn is 3 bushels of wheat. Present production is: | |Iowa |Nebraska | |Wheat |20 million bushels |120 million bushels | |Corn |120 million bushels |20 million bushels |

a. Explain how, with trade, Nebraska can wind up with 40 million bushels of wheat and 120 bushels of corn while Iowa can wind up with 40 million bushels of corn and 120 million bushels of wheat.

b. . If the states ended up with the numbers given in a, how much would the trader get?

2) The Ali Baba Co is the only supplier of a particular type of Oriental carpet. The estimated demand for its carpets is Q= 112,000 – 500P + 5M, where Q= number of carpets, P= price of carpets (dollar per unit), and M= consumers income per capita. The estimated average variable cost function for Ali Baba’s carpets is AVC= 2000 – 0.012Q + 0.000002Q2

Consumers income per capita is expected to be $20,000 and total fixed cost is $100,000 1. How many carpets should the firm produce in order to maximize profit? 2. What is the profit maximizing price of carpets?

3. What is the maximum amount of profit that the firm can earn selling carpets? 4. Answer parts a through c if consumer’s income per capita is expected to be $30,000 instead.

3)Ever Kleen Pool Services provides weekly swimming pool maintenance in Atlanta.  Dozens of firms provide this service.  The service is standardized;each company cleans the pool and maintains the proper levels of chemicals in the water. The service is typically sold as a four month summer contract.  The market price for the four month service contract is $115. Ever Kleen Pool Services has fixed costs of $3500.  The manager if Ever Kleen has estimated the following marginal cost function for Ever Kleen, using data for the last two years:

SMC=125 - 0.42Q  +0.0021Q^2     (suppose to be exponent 2)

Where SMC is measured in dollars and Q is the number of pools serviced each summer.  Each of estimated coefficients is statistically significant at the 5 percent level.

a.Given the estimated marginal cost function, what is the average variable cost function for EverKleen?

b.At what output level does AVC reach its minimum value?  What is the value of AVC at its minimum point?

c.Should the manager of EverKleen continue to operate, or should the firm shut down?  Explain.

d.The manager of EverKleen finds two output levels that appear to be optimal.  What are these levels of output and which one is actually optimal?

e.How much profit (or loss) can the manager of EverKleen Pool Services expect to earn?

f.Suppose EverKleen's fixed costs rise to $4000. How does this affect the optimal level of output ?  Explain


Answer 1:



W20m bushels120m bushels

C120m bushels20m bushels

The opportunity cost of producing 1 bushels of wheat is 3 bushels of corn i.e 1W=3C

• OC Theory says that if a country can produce either commodity W or C; the OC of commodity W is the amount of the other commodity C that must be given up in order to get one additional unit of commodity C.

• The OC of producing 1 bushel of corn is 3 bushels of wheat. i.e 1C=3W

• Every country should specialize in the production of that commodity which it can produce more cheaply than others and exchange it for the commodities which cost less in other countries; so lowa if uses all its resources in production of corns can produce 60m more bushels of corn.

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