Economics: Principles and Policy (MindTap Course List)
13th Edition
ISBN: 9781305280595
Author: William J. Baumol, Alan S. Blinder
Publisher: Cengage Learning
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Chapter 7.A, Problem 2TY
To determine
Change in the cost of inputs and the budget line and indifference curve of the firm.
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When a firm is using a technically efficient input combination, the firm is also producing in an economically efficient manner. What is your take on this statement?
4. Ikea Inc., a home remodeling business. The number of square feet they can remodel in
a day is described by the Cobb-Douglas production function Q= F (L,K)= 4K"L*
where I. is their number of workers and K is units of capital. The wage rate is $5 a day,
and a unit of capital costs $20 a day. What is their minimum cost input combination for
remodeling (Q=200) 200 square feet a day? What is the total minimum cost level?
Given the input-output matrix below, find the output matrix if final demand changes to 600 for water, 180 for electric power, and 700 for agriculture.
Industry
Electric
Power
Water
120
Agriculture Final Demand
240
320
160
Water
480
270
Electric Power
Agriculture
Other
Industry:
60
120
170
400
180
240
240
360
80
The output matrix is X=.
(Round to two decimal places as needed.)
Chapter 7 Solutions
Economics: Principles and Policy (MindTap Course List)
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- Complete the following table and answer the short discussion question Marginal Cost (MC) Total Output (Q) Total Total Average Fixed Cost Average Variable Cost (AVC) Average Cost (AC) Cost Fixed Variable Cost (TVC) (АFC) (ТC) Cost (TFC) $50 0 $75 1 $100 2 $120 $135 $150 5 $190 6 $260 7 Given the results from your table, what level of output would you produce to minimize cost per unit? If the price of the product is $20 per unit, how many units of output would you produce? What is your decision rule?arrow_forward4. Ikea Inc., a home remodeling business. The number of square feet they can remodel in a day is described by the Cobb-Douglas production function Q= F (L,K)= 4K5L0.5 where L is their number of workers and K is units of capital. The wage rate is $5 a day, and a unit of capital costs $20 a day. What is their minimum cost input combination for remodeling (Q=200) 200 square feet a day? What is the total minimum cost level? (15p)arrow_forwardConsider the following two systems of production, which produce the same quantity. A (assemble by hand) requires: 35 workers 1 robot B (assemble by robot) requires: 5 workers 4 robots Price of one unit of inputs (thousands): worker: £2 robot: £50 Draw the axes of a cost diagram as follows: · units of labour on the x-axis, with a scale from 0 to 70 · units of capital on the y-axis, with a scale from 0 to 5. Now mark system A and system B as points on this diagram. Draw an isocost line at C = £120. Comment on which system you would choose, and why.arrow_forward
- Suppose that the production function for Hannah and Sam's home remodeling business is Q = F(L,K) Q = 10L0.1K0.4.Assume the wage rate is $8,000 per week and the cost of renting a unit of capital is $1,000 per week.a. What is the least-cost input combination for remodeling 400 square feet each week? Instructions: Round your answers to 2 decimal places. units of labor and units of capital. b. What is the total cost? Instructions: Round your answer to 2 decimal places. $ .revised jrl 08-11-2011arrow_forwardSuppose that the production function for Hannah and Sam's home remodeling business is Q=f(L,K) Q=1040.2K0.3 Assume the wage rate is $8,000 per week and the cost of renting a unit of capital is $2,000 per week. a. What is the least-cost input combination for remodeling 100 square feet each week? Instructions: Round your answers to 2 decimal places. units of labor and units of capital. b. What is the total cost? Instructions: Round your answer to 2 decimal places.arrow_forwardComplete the following table and answer the short discussion question. Average Cost (AC) Average Fixed Cost Total Cost Average Variable Cost Output (Q) Total Fixed Total Variable Marginal Cost (MC) Cost (TVC) Cost (TFC) (TC) (AFC) (AVC) $50 $75 1 $100 2 $120 3 $135 4 $150 5 $190 6 $260 Given the results from your table, what level of output would you produce to minimize cost per unit? If the price of the product is $20 per unit, how many units of output would you produce? What is your decision rule?arrow_forward
- Question 5: Suppose a brewery uses a Cobb-Douglas production function for his production. He studies the production process and finds the following. An additional machine-hour of fermentation capacity would increase output by 500 bottles per day (i. e. MPK = 500). An additional man-hour of labor would increase output by 1000 bottles per day (i. e. MPL = 1000). The price of a man- hour of labor is $50 per hour. The price of a machine-hour of fermentation capacity is $5 per hour. 1. Is the brewery currently minimizing its cost of production? Check using the minimization condition. 2. It turns out, the brewery is not optimally chossing the factors of production. To lower its production cost, which factor of production should the brewery increase and which factor should he decrease? 3. Suppose that the price of a machine-hour of fermentation capacity rises to $25 per hour. How does this change the answer from part 1?arrow_forwardGiven that TC=2000+100Q-10Q2+Q3 where Q is level of output and maximum level of MP is 15 units, answer the following question based on the given information. A. Determine the TFC ,TVC,AVC,AFC,AC and MC functions b. Calculate the level of output at which AVC and AC reaches its minimum c Draw the relationship between production and cost curve and What relationship do you observe between production and cost curves? Why is this so? G At 5 units AVC,APL is 10,what is the maximum APL?arrow_forwardQuestion 5: Suppose a brewery uses a Cobb-Douglas production function for his production. He studies the production process and finds the following. An additional machine-hour of fermentation capacity would increase output by 500 bottles per day (i.e. MPK = 500). An additional man-hour of labor would increase output by 1000 bottles per day (i.e. MPL = 1000). The price of a man-hour of labor is $50 per hour. The price of a machine-hour of fermentation capacity is $5 per hour. 2. It turns out, the brewery is not optimally chossing the factors of production. To lower its production cost, which factor of production should the brewery increase and which factor should he decrease?arrow_forward
- The following table shows the capital and labor requirements for 10 different levels of production. Assuming that the price of labor (PL) is $9 per unit and the price of capital (PK) is $8 per unit, compute and graph total cost, marginal cost, and average cost for the firm. To do this, fill in the total cost for each output level in the table below. (Enter your responses as whole numbers.) q 0 1 2 3 4 5 6 7 8 9 10 K 0 20 20 20 20 20 20 20 20 20 20 L 0 3 7 10 13 17 23 31 41 53 67 TC 0arrow_forwardLet us assume you are a consultant of a firm. You realize that due to costs structures changes, the price of the firm is now below the average total cost, but this price is greater than the average varible cost. Your partner in the consulting business suggests you that to reduce output and reduce the price as well. Do you agree with this statement? Explain why you do or do not. Only typing answer Please explain step by steparrow_forwardConsider the following production function of DVDS: Q = K0.5L 0.5, where Q represents DVDS (boxes per hour), K denotes capital input (units per hour), and L denotes labour input (units of worker time per hour). The unit cost of capital and labour are $40 and $20, respectively. a) What is the optimal input ratio of labour and capital for the production? b) Determine the appropriate input mix to produce 800 boxes of DVDS. Compute the cost of production. c) Suppose the government decided to offer a subsidy that would make the cost of labour $15. What is the optimal input mix to produce the same level of output, and the new cost of production? Also, compute the substitution effect in the employment of labour.arrow_forward
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