Managerial Economics (MGE2)

Sec E, F, G, H
Home Work 2
Total 50 Marks
Instructions:

1. Print the assignment on A4 paper (double side). If printed on one side,

contents on the back of paper will not be evaluated.
Answers to Part I to be provided only in the space provided.
Answers to Part II to be provided by encircling the correct choice.

2.
3.
4. The writing must be comprehendible anything that is not legible will be ignored
and hence penalized.
5. Due date is Sunday May 11, 11:59 pm
6. Mode of submission is hard copy only. A drop box will be available outside AC2
CTY Level, Academic Associates office.
7. Soft copy submission will NOT BE accepted.
8. Assignments after due date and time will NOT BE accepted.
9. Honor code 3 is applicable.

This is a group assignment. Mention your group ID, group members names and
IDs below.
Group ID:
Name of Group Member

PGID

Part I

Question 1 (20 Points): Consider a firm which has a production function such that Q = 2[KL]

0.5

where K is the capital and L is the labor required to produce Q quantities of good. Lets say the
cost of labor is 5 per unit of labor and the cost of capital is 5 per unit of capital. Now suppose the
firm is endowed with 25 units of capital K
a.
i.

Derive the short run total cost (SRTC)

ii.

Derive the short run average cost (SRAC)

iii.

Derive the short run marginal cost (SRMC)

b. The firm faces a demand curve for its product such that P=20 Q.
I.

Derive the optimal price and quantity that a firm should produce if it were to
undertake production in the short run

II.

Show that optimal price you derived is less than SRAC. Should the firm
produce in the short run?

c. In the long run the firm can vary its entire input requirement. This implies that if it has
more capital than it needs then it can sell extra capital in the free market at the market
rate which is 5 per unit.
i. Derive the long run total cost
ii. Derive the long run average cost
iii. Derive the long run marginal cost
d. As in part (b), firm faces demand curve P= 20 Q.
i.

If the firm was to undertake production then what is the optimal quantity it would
produce and the price it will charge.

ii.

What is the firms capital requirement?

iii.

If the firm has more capital than it needs then what should it do?

iv.

Derive the profits of the firm.

e.
i.

If the firm did not produce anything and sold off its entire capital endowment at 5
per unit, then how much would the firm earn?

ii.

Based on (e) (i), should the firm produce any quantity in the long run?

Solution 1:

Question 2 (20 Points): Consider a golf club that could potentially cater to two types of clients,
rich and the poor. Rich have a demand curve for golf which is Pr= 120 Gr, where Gr is the
number of games you play and Pr is the price you are willing to pay for it. Similarly the poor
have a demand which is Pp= 60 Gp, where Gp is the number of games you play and Pp is the
price poor are willing to pay for it.
The cost to the firm per unit of the game equal to 12
a. Suppose the golf club can price discriminate between rich and poor then
i. What is price it will charge rich customers vs poor customers.
ii. Calculate the profits of the golf club.
b. Now suppose the golf club cannot price discriminate then
i. What is the optimal price it will charge?
ii. Calculate the profits of the firm.
c. Now suppose the firm can set entry fee and charge a user fee per game
i. What entry fee and the user fee will it charge to its clients to maximize profits?
ii. What are the profits of the firm?
d. Based on (a), (b), (c), what will be your advice to the golf club.

Part II: Circle the correct Choice (10 Points)

1. An example of implicit costs is the
a) bad-debt liabilities arising out of excessive sales on credit
b) wages paid to the owners children
c) opportunity cost of owner-supplied capital and labor that is not recognized by
accountants
d) prices paid for purchased inputs
e) the alternative uses for money that could be borrowed
2. If there is only one variable input, average variable cost can be defined as the:
a) outputs price divided by the inputs average product
b) outputs price divided by the inputs marginal product
c) price of the variable input divided by its average product
d) price of the variable input divided by its marginal product
e) price of the variable input multiplied by its marginal product
3. When average total cost is at its minimum:
a) average variable cost is declining with increases in output
b) average variable cost plus average fixed cost is declining with increases in
output
c) average total cost is equal to average variable cost
d) marginal cost is equal to average variable cost
e) marginal cost is equal to average total cost
4. When average variable cost is at its minimum:
a) average total cost is increasing with increases in output
b) average variable cost plus average fixed cost is increasing with increases in
output
c) average total cost is equal to average variable cost
d) marginal cost is less than average total cost
e) marginal cost is greater than average total cost
5. The long run is a time period during which:
a) all inputs are semi variable
b) all inputs except capital and entrepreneurship are variable
c) average variable costs are strictly less than average total cost
d) all inputs are quasi-variable
e) all inputs are variable
6. The long-run average cost curve slopes upward if there are:

a)
b)
c)
d)
e)

some factors without diminishing marginal returns

diseconomies of scope in the management of multi plant operations
economies of scale
diseconomies of scale
no factors without diminishing marginal returns
3

7. Leisure Enterprises total cost of producing speedboats is given by TC = 10Q 4Q2

+ 25Q + 500. On the basis of this information, the marginal cost of producing the
25th speedboat is:
a) $1,700
b) b. $6,050
c) c. $18,575
d) $18,775
e) $19,075
3

8. Paces total cost of producing CO2 cartridges is given by TC = 0.5X - 24X + 144X.
The level of output that minimizes average total cost is:
a) 12 cartridges
b) 10 cartridges
c) 18 cartridges
d) 20 cartridges
e) 24 cartridges
9. Economies of scope exist when it is cheaper to produce:
a) with a large fixed plant and equipment
b) at increasing rates of output
c) given quantities of two different products together than to produce the same
quantities separately
d) given quantities of two different products separately than to produce the same
quantities together
e) using more than one technique
1/2

10. The Wilson Corporation produces output according to Q = 4(KL) , where K is

the amount of capital used and L is the amount of labor employed. If capital costs $2
per unit and labor costs $8 per unit, Wilsons minimized long-run average total cost
is:
a) $2
b) $2Q
c) $10
d) $10Q
e) $22