University of the Philippines

School of Economics
Economics 162
Managerial Economics
Exercise No. 4

J. Abrenica 19 February 2019

Note: This is not a graded exercise. For class discussion only.

I. Ethan Resources (ER) has two mines with different capabilities for producing the
same type of ore. After mining and crushing, the ore is graded into 3 classes: high,
medium and low. ER was contracted to provide local smelters with 24 tons of high-
grade ore, 16 tons of medium-grade ore and 48 tons of low-grade ore each week. It
costs 10,000 per day to operate Mine A and 5,000 per day to run Mine B. In a day’s
time, Mine A produces 6 tons of high-grade ore, 2 tons of medium-grade ore, and 4
tons of low-grade ore. Mine B produces 2, 2, and 12 tons per day of each grade,
respectively. ER’s problem is to determine how many days per week to operate each
mine under current conditions.
a) How much, if any, excess production would result if the operating decision is
based on minimizing costs?
b) What would be the cost effect of increasing low-grade ore sales by 50
percent?
c) What is ER’s minimum acceptable price per ton if it is to renew a current
contract to provide one of its customers with 6 tons of high-grade ore per
week?
d) With current output requirements, how much would the cost of operating Mine
A have to rise before ER changes its operating decision?
e) What increase in the cost of operating Mine B would cause ER to change its
current operating decision?

II. (Ragsdale, p. 43, #21) A farmer in Georgia has a 100-acre farm on which to plant
watermelons and cantaloupes. Every acre planted with watermelons requires 50
gallons of water per day and must be prepared for planting with 20 pounds of
fertilizer. Every acre planted with cantaloupes requires 75 gallons of water per day
and must be prepared for planting with 15 pounds of fertilizer. The farmer estimates
that it will take 2 hours of labor to harvest each acre planted with watermelons and
2.5 hours to harvest each acre planted with cantaloupes. He believes that
watermelons will sell for about $3 each, and cantaloupes will sell for about $1 each.
Every acre planted with watermelons is expected to yield 90 salable units. Every acre
planted with cantaloupes is expected to yield 300 salable units. The famer can pump
about 6,000 gallons of water per day for irrigation purposes from a shallow well. He
can buy as much fertilizer as he needs at a cost of $10 per 50-pound bag. Finally,
the farmer can hire laborers to harvest the fields at rate of $5 per hour. If the farmer
sells all the watermelons and cantaloupes he produces, how many acres of each
crop should the farmer plant in order to maximize profits?
a) How much can the price of watermelons drop before it is no longer optimal to
plant any watermelons?
b) How much does the price of cantaloupes have to increase before it is optimal
to only grow cantaloupes?
c) Suppose the price of watermelons drops by $60 per acre, and the price of
cantaloupes increases by $50 per acre. Is the current solution still optimal?
d) Suppose the farmer can lease up to 20 acres of land from a neighboring farm
to plant additional crops. How many acres should the farmer lease, and what
is the maximum amount he should pay to lease each acre?

-end-