maximizing output relative to its labor cost
1) Petram Company has two plants, one in the United States and one in Vietnam, and it cannot change the size of the plants or the amount of capital equipment. The hourly wage in Vietnam is $5, while the hourly wage in the United States is $20. Given current employment, the marginal product of the last worker in Vietnam is 100, and the marginal product of the last worker in the United States is 500. Based on this information, answer the following questions.
- Is the firm maximizing output relative to its labor cost? Explain how you know.
- If it is not, what should the firm do?
2) How would each of the following affect the firm’s marginal, average, and average vari-able cost curves?
- a) There is an increase in wages.
- b) There is a decrease in material costs.
- c) The government imposes a fixed amount of tax.
- d) The rent that the firm pays on the building that it leases decreases.
3) A firm’s marginal product of capital is twice its marginal product of labor; the price of labor is $6, and the price of capital is $3. Is the firm minimizing cost? If not, how can it reduce its cost? Explain.
4) I had to do screen shot for this one due to math keyboard.
5) For each of the following functions, describe returns to scale.
- a) Q = K + L
- b) Q = K1/2L3/4
- c) Q = K2L
6) You are about to open a business and must obtain a license from the city for $25,000. The license is transferable, but only $4,000 is refundable in the event the firm does not use the license.
- a) What are your fixed costs? What are your sunk costs?
- b) Suppose the manager obtains a license but then decides against opening the business. If another firm offers the manager $3,000 for the license, should the manager accept the offer? Explain.
7) Had to screen shot #7 below
8) Suppose the average cost function of MEGA Company is given by the equation AC = 3 + 4Q.
- a) What is the total cost?
- b) If the price is $2, does this firm make a profit or loss? Show your work.
9) Screen shot #9 below
10) The cost function for KLM Company is given by C(Q) = 100 + 10Q + Q2, where costs are measured in thousands of dollars, and output is measured in thousands of hours rented.
- What is the average fixed cost of producing 4 units of output?
- What is the average variable cost of producing 4 units of output?
- What is the average total cost of producing 4 units of output?
- What is the marginal cost of producing 4 units of output?
- What is the relationship between the answers to a, b, and c above?