Problem Set on Production/Costs Micro Principles

1. State whether the following decision is a short-run or long-run decision (and why):

a. ADM is deciding whether to install machinery that uses Human Machine Interface technology or 8- layer PCB prototype technology in its manufacturing plant.

b. Wal-Mart hires additional seasonal workers during November and December.

c. Bassett furniture manufacturers closes all manufacturing plants in North Carolina, USA and outsources its furniture production to manufacturing plants in China.

d. General Motors purchases new equipment to replace depreciating equipment.

2. Use the table below to answer the following questions.

Labor                      Number of shoes

Per day                  produced Per day

1                                 5

2                                12

3                                21

4                                29

5                                35

6                                39

7                                39

8                                35                 

a. Graph the total product and marginal product of workers per day.

b. Marginal product of the third worker is?

c. At what point does diminishing marginal productivity set in?

d. Indicate the area that a business will operate. Explain your reasoning.

3. Use the two graphs, below the following table, to graph the data contained in the table (below). On the left hand diagram, graph total costs, total fixed costs and total variable costs. On the right hand diagram, graph average total costs, average fixed costs, average variable costs and marginal cost.

a. What are variable costs of producing 5 units?

b. What is average total cost of producing 3 units?

c. What is average fixed cost of producing 4 units?

d. What is the marginal cost of producing the 2nd unit?

e. How much are fixed costs in this case?

f. What is average variable cost of producing 1 unit?

4. The table below shows three possible combinations that use the least amount of resources needed to produce 35 tennis rackets. A unit of capital costs $75 and a unit of labor costs $10.

Combination          Labor              Capital

A                          5                      50

B                         10                     40

C                         12                     42         

a. Which combination(s) are technically efficient? Explain your answer.

b. Which combination(s) are economically efficient? Explain your answer

5. State whether the following firms are experiencing economies of scale or diseconomies of scale (and why).

a. West Company can produce 1,500 units at an average total cost of $2.50 or 1,800 units at an average total cost of $2.25.

b. North Company can produce 500,000 units at a total cost of $220,000 or 600,000 units at a total cost of $250,000.

c. Iams can produce 10,000 bags of dog food at a total cost of $150,000. If they increase their production by 7%, total costs will rise by 3%.

6. A firm faces the following long-run total cost curve and is deciding what size factory to build. Refer to the graph below to answer the following questions:

a. When this firm is deciding what size factory to build is it making a short-run or long-run decision?

b. If it wants to produce 200 units, what short-run total cost curve is consistent with the factory it should choose?

c. Is the firm experiencing economies or diseconomies of scale between 200 and 700 units?

d. What is the minimum efficient level of production facing this firm?