Autumn 2021

Managerial Economics – I

Assignment #3

1. Complete the following table, assuming that each unit of labor costs $75 per day.

Quantity
of Labor Output Fixed Variable Total Marginal
per day per day Cost Cost Cost Cost
0 ____ $300 $____ $____ $____
1 5 ____ 75 ____ 15
2 11 ____ 150 450 12.5
3 15 ____ ____ 525 ____
4 18 ____ 300 600 25
5 20 ____ ____ ____ 37.5

a. Graph the fixed cost, variable cost and total cost curves for these data.
b. What is the marginal product of the third unit of labor?
c. What is average total cost when output is 18 units per day?

2. Complete the following table, where L is the unit of labor, Q is units of output, and MP is the
marginal product of labor.

L Q MP VC TC MC ATC
0 0 ____ $0 $12 ____ ____
1 6 ____ $3 15 ____ ____
2 15 ____ $6 ____ ____ ____
3 21 ____ $9 ____ ____ ____
4 24 ____ $12 ____ ____ ____
5 26 ____ $15 ____ ____ ____

a. At what level of labor input do the marginal returns to labor begin to diminish?
b. What is the average variable cost when Q = 24?
c. What is this firm’s fixed cost?
d. What is the wage rate per day?

3. Let the production function of a mobile phone manufacturer Metro Co. be given by Q = 25 LK
where Q is the quantity of mobile phones produced in the month, L is the number of workers
employed and K is the number of machines used in the production. The monthly wage rate is
given as $3,000 per worker and the monthly rental rate for a machine is $6,000. Currently Metro
Co. employs 25 workers and 40 machines. Assume in this case perfect divisibility of labour and
machines.
 a. What is the current average product of labour for Metro Co.? What is the current
marginal product of machines? (Assume 1 unit increase in machines)
b. Does the company's production function display increasing decreasing or constant
returns to scale? Explain.
c. What is the total cost of the current production of Metro Co. for a month? What is the
average cost of to produce a mobile phone? Assuming the number of machines does not
change, what is the marginal cost of producing one additional phone?
d. What is the law of diminishing returns? Does this production function display this
characteristic? Explain.

4. Gamma Corporation, one of the firms that employs you as a financial analyst, is considering
buying out Beta Corporation, a small manufacturing firm that is now barely operating at a profit.
You recommend the buyout because you believe that new management could substantially
reduce production costs, and thereby increase profits to a quite attractive level. You collect the
following production information in order to convince the CEO of Gamma Corporation that Beta
is indeed operating inefficiently.
MPL = 10
PL = $20
MPK = 15
PK = $15
Explain how these data provide evidence of inefficiency. How could the new manager of Beta
Corporation improve efficiency? Can you relate the information with graphical representation?

5. Answer the following with relevant examples where applicable.

a. Differentiate between economies of scale and economies of scope. What are learning
curves and how do they differ from economies of scale?
b. ‘Returns to scale’ is linked to cost variation and technology of production (give
diagrammatic presentation). Discuss cases where firms have really benefitted by
increasing returns to scale and captured a significant market share.