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Assignment No 2 Production Theory

The document contains two problems related to production theory. Problem 1 provides data on the daily tuna catch from a fishing company using different crew sizes. It asks to determine diminishing returns, delineate production stages, and calculate optimal crew size given market prices and daily wages. Problem 2 provides data on output for a car rental service with different vehicle-mechanic combinations. It asks to determine the optimal combination given annual costs and find the solution graphically.

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Cami Kmyutza
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2K views2 pages

Assignment No 2 Production Theory

The document contains two problems related to production theory. Problem 1 provides data on the daily tuna catch from a fishing company using different crew sizes. It asks to determine diminishing returns, delineate production stages, and calculate optimal crew size given market prices and daily wages. Problem 2 provides data on output for a car rental service with different vehicle-mechanic combinations. It asks to determine the optimal combination given annual costs and find the solution graphically.

Uploaded by

Cami Kmyutza
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ECOI1

Exam assignment no 2
Period: From Wednesday 29th February to Sunday 4th March 2012 Production Theory
With reference to Managerial Economics chapter 6

Problem 1
The Oceanic Pacific fleet has just decided to use a pole-and-line method of fishing instead of gill netting to catch tuna. The latter method involves the use of miles of nets strung out across the ocean and therefore entraps other sea creatures besides tuna (e.g. porpoises, sea turtles). Concern for endangered species was one reason for this decision, but perhaps more important was the fact that the major tuna canneries in the United States will no longer accept tuna caught by gill netting. Oceanic Pacific decided to conduct a series of experiments to determine the amount of tuna that could be caught with different crew sizes. The results of these experiments follow.
Number of Fishermen 0 1 2 3 4 5 6 7 8 9 Daily Tuna Catch (lb.) 0 50 110 300 450 590 665 700 725 710

a. Determine the point at which diminishing returns occurs. b. Indicate the points that delineate the three stages of production. c. Suppose the market price of tuna is $3.50/pound. How many fishermen should the company use if the daily wages rate is $100? d. Suppose a glut in the market for tuna causes the price to fall to $2.75/pound. What effect would this have on the number of fishermen used per boat? e. Suppose the price rose to $5.00/pound. What effect would this have on its hiring decision? f. Suppose the daily wages rate rose to $150, and the market price of tuna is $3.50/pound. What effect would this have on the companys hiring decision? g. Suppose the company realizes that to keep up with the demand for tuna caught by the more humane pole-and-line method of fishing, each of its boats must catch at least 1,000 pounds of fish per day. Given the preceding data, what should the company consider doing?

ECOI1

Problem 2
The owner of a small car rental service is trying to decide on the appropriate numbers of vehicles and mechanics to use in the business for the current level of operations. The output is fixed. He recognizes that his choice represents a trade-off between the two resources. His past experience indicates that this tradeoff is as follows.
Vehicles Mechanics 100 2,5 (includes one part-timer) 70 5 50 10 40 15 35 25 32 35

a. Assume the annual (leasing) cost per vehicle is $6,000 and the annual salary per mechanic is $30,000. What combination of vehicles and mechanics should he employ? b. Illustrate this problem with the use of an isoquant/isocost diagram. Indicate graphically the optimal combination of resources.

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