Suggestions for mixed bag II
The suggestions for the mixed bag are organized by problem.
Problem 1: If the wage rate rises by 20% and labor is the only variable cost of production, what is the percentage change in total variable costs at every level of output? What effect will the 20% rise in the wage rate have on fixed costs? If need be, construct a numerical example to answer these questions. Based on the answers to these questions, you should be able to derive the effects of the wage increase on the various cost curves referred to in individual questions 1-4 and individual question 6. Individual questions 5, 7, 8, and 9 deal with how much the firm will supply after the increase in wage rates under different conditions about the price of the firm’s output. You can answer these questions by first answering the following questions. Assuming it is profitable to supply a positive level of output, what cost schedule determines the profit-maximizing level of output that will be supplied at a given price? What happens to this schedule as a result of the 20% increase in the wage rate? If the price of output also increases by 20%, what happens to the profit-maximizing level of output? Analyze this last question graphically based on the cost schedule(s) that determine the profit-maximizing level of output. If the price of output does not increase at all or by less than 20%, what happens to the profit-maximizing level of output in your graph? Under what condition would a firm shut down? Can you tell whether this condition would be satisfied if the price of output did not change?
Problem 2: You are told that doubling the tax from $1 to $2 will cause the price of whiskey to rise from $10 to $11. What effect would you expect this to have on the quantity demanded? How would the change in the quantity demanded affect whether the state would double its revenues from the tax? The answers to these questions should enable you to answer individual questions 10 and 11. In the other individual questions, you are given information about the price or income elasticity of demand. What does the income elasticity of demand tell you about how the increase in the tax and the resulting increase in price will affect total consumer expenditures on whiskey? The answer to this question should enable you to answer individual question 13. In the other two individual questions, you need to think about how knowledge about the price elasticity of demand can be used to assess whether the tax increase will lead to an increase in the total tax revenues taken in by the state. If the tax per unit doubles, by how much can the quantity demanded fall and the total tax revenues taken in by the state still increase? How can you use the price elasticity of demand coupled with the magnitude of the price increase to ascertain whether the decrease in the quantity demanded will be such that the total tax revenues taken in by the state will increase?
Problem 3: You are told there are two types of firms with the same fixed costs but one has 10% higher variable costs at every level of output than the other. This is similar to problems in which some event occurs that causes total variable costs to rise by 10% at every level of output. You should be able to answer individual questions 15 and 16 using this analogy and your understanding of how a 10% increase in total variable costs at every level of output affects the various cost curves. Individual questions 17 and 18 involve supply. You are told that only the lower-cost producers are supplying steel. Based on the discussion on page 154 of the textbook concerning when the price is too low to justify producing any output in the short run, what does this imply about the price of steel relative to the average variable costs of the higher-cost firms? How much higher are the average variable costs of the higher-cost firms than the lower-cost firms? If the price of steel increased by 10%, how would this change the price of steel relative to the average variable costs of the higher-cost firms? Your answer to this question should enable you to answer individual question 17. Individual question 18 asks if the profit-maximizing level of output for the lower-cost firms would increase by 10% if the price increased by 10%. Given price, what determines the profit-maximizing level of output (when it is profitable for the firm to supply a positive level of output)? Graphically analyze how the profit-maximizing level of output would change when price increases by 10%. Does the extent of the increase in the quantity supplied depend on the nature of any of the relevant curves in your graph? Use your answer to this question to answer individual question 18.
Problem 4: You are told that a firm’s costs, all of which are independent of the level of output produced, fall by 20% and the firm wants to earn the same profit as before the cost decrease. Profit equals total revenue minus total cost. If total cost falls by 20%, then the firm must somehow reduce its revenues to maintain its profits. To answer the individual questions, first answer the following questions. What does the firm control that could influence its revenues? What do the price and income elasticities of demand tell you about the effect of any changes the firm could make on its total revenues?
Problem 5: If the firm receives a subsidy of $5,000 for each home it produces, how will this affect the marginal cost of production of each home? How will it affect the average total cost of production of each home? Answering these questions should enable you to answer individual questions 25 and 26. The other questions involve supply decisions. What curves determine short-run supply decisions—what determines whether it is worthwhile for firms to supply a positive level of output in the short run (review page 154 of the textbook if you do not recall this) and if it is, what determines the profit-maximizing level of output? Analyze graphically how the subsidy affects the key cost curves and how this affects the quantity supplied and profits earned assuming the price of homes is unchanged. This will enable you to answer individual questions 27, 28, and 29. How does the subsidy affect the condition required for it to be profitable to supply a positive level of output? Use your answer to this question to answer individual question 30.