Part 1

1. A study of the costs of electricity generation for a sample of 56 British firms in 1946-1947 yielded the following long-run cost function:

+ .003Q + .0000029Q^2 - .000046QZ - .026Z + .00018Z^2

where variable cost measured in pence per kilowatt-hour. (A pence was a British monetary unit equal, at that time to 2 cents U.S.)
measured in millions of kWh per year
size, measured in thousands of kilowatts

A. Determine the long-run variable cost function for electricity generation.

B. Determine the long-run marginal cost function for electricity generation.

C. Holding plant size constant at 150,000 kilowatts, determine the short-run average variable cost and marginal cost functions for electricity generation.

D. For a plant size equal to 150,000 kilowatts, determine the output level that minimizes short-run average variable costs.

E. Determine the short-run average variable cost and marginal cost at the output level obtained in Part (D).

2. Assuming that all other factors remain unchanged, determine how a firm's breakeven point is affected by each of the following:

A. The firm finds it necessary to reduce the price per unit because of competitive conditions in the market.

B. The firm's direct labor costs increase as a result of a new labor contract.

C. The Occupational Safety and Health Administration requires the firm to install new ventilating equipment in its plant. (Assume that this action has no effect on worker product

3. Cool-Aire Corporation manufactures a line of room air conditioners. Its break even sales level is 33,000 units. Sales are approximately normally distributed. Expected sales next year are 40,000 units with a standard deviation of 4,000 units.

A. Determine the probability that Cool-Aire will incur an operating loss.

B. Determine the probability that Cool-Aire will operate above its break-even point.

Part 2

1. Television channel operating profits vary from high as 45 to 55 percent at MTV and Nickelodon down to 12 to 18 percent to NBC and ABC. Provide a Porter Five Forces analysis of each type of network. Why is MTV so profitable relative to major networks?

2. Assume that a firm is a perfectly competitive industry has the following total cost schedule
Outputs (units)
Total Cost ($)
10
$110
15
$150
20
$180
25
$225
30
$300
35
$385
40
$480

A. Calculate a marginal cost and an average cost schedule for the firm.

B. If the prevailing marketing price is $17 per unit, how many units will be produced and sold? What are the profits per unit? What are the total profits?

C. Is the industry in long-run equilibrium at this price?

3. Which of the following products and services are likely to encounter adverse selection problems: golf shirts at traveling pro tournaments, certified gemstones from Tiffany's graduation gift travel packages, or mail-order auto parts? Why or why not?