Question 1

Applied Problem #6 on page 310 about a Business Week article with a story of a furniture factory manager:

Business Week, in an article dealing with management, wrote, "When he took over the furniture factory three years ago ... [the manager] realized almost immediately that it was throwing away at least $100,000 a year worth of wood scrap. Within a few weeks, he set up a task force of managers and workers to deal with the problem. And within a few months, they reduced the amount of scrap to $7,000 worth [per year]."

Was this necessarily an economically efficient move?

a. Not necessarily. There are opportunity costs to reduce scrap. The manager may, for example, have spent $94,000 (e.g., lost time for the task force when they could have been working) to reduce the scrap by the $93,000 that he did.
b. Not necessarily. The manager did not go far enough. The most economically efficient outcome would be to reduce scrap altogether. Even at the reduced amount, the company is literally throwing away $7,000 per year when it could recoup that amount with greater diligence.
c. Yes. Even if it is scrap, the wood still retains value (as evidenced by the ability to quantify it at $100,000 or $7,000). The scrap wood could be reused or resold, so it is in the company's best interest to reduce scrap as much as possible, ideally to zero.
d. Not necessarily. The fact that it is scrap wood implies that it is not useful for the company's purposes, i.e., making furniture. It is presumptuous to associate a value of $100,000 or $7,000 to the scrap since there is no market for it and thus no market value can be assigned. There is no rational way to calculate the optimal amount of scrap wood.

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You have collected the following data on output and total variable costs:

Question 2

Over what range of output does this firm exhibit increasing returns (increasing MP), and diminishing returns (decreasing MP)?

a. Increasing returns for output levels at 7 and lower, and decreasing returns for output levels at 8 and higher.

b. Since costs continually increase, decreasing returns is present immediately; there is no range where the firm experiences increasing returns.

c. Increasing returns for output levels at 5 and lower, and decreasing returns for output levels at 6 and higher.

d. Increasing returns for output levels at 6 and lower, and decreasing returns for output levels at 7 and higher.

Question 3

Current fixed costs for the company equal $200. Draw two graphs, both with Q on the horizontal axis: one graph shows TVC and TC, and the other shows AVC, AC, and MC.Suppose that the government imposes a $50 property tax hike on all businesses; how will that affect your two graphs; i.e., which cost curves will be affected and how?

a. The property tax will shift up TC by $50 and AC by $50/Q (i.e., $50 divided by Q).
b. TVC and AVC will shift up by $50/Q (i.e., $50 divided by Q).
c. MC will shift up by $250, the new fixed cost amount.
d. TC will shift down by $50 since it reduces profitability by that amount.

Question 4

Suppose instead that the government considers your production process to be polluting, and imposes a $10 tax per unit produced. How does this tax increase compare to the property tax increase, in terms of the effect on your company's cost curves?

a. A per-unit tax will shift up all the curves (TC, TVC, AVC, AC, and MC).
b. The per-unit tax will affect fixed costs, so it will shift up TC and AC, but not the TVC, AVC, or MC curves.
c. Since the per-unit tax reduces profitability, it will shift all of the curves downward by $50.
d. The per-unit tax will only affect and shift up the marginal cost curve; the others will remain where they are.

Question 5

Your boss says "either of these taxes is going to force us to change our production levels." Given what you know about optimization analysis, how would you respond?

a. Since neither tax is a true "cost" of production (they are unlike paying salaries or buying raw materials), then neither of them affect the optimal choice of Q.
b. Optimization depends partly on marginal cost; since the property tax affects MC but the per-unit tax doesn't, the property tax will alter the optimal Q while the per-unit tax will not.
c. Optimization depends partly on marginal cost, which is not affected by the property tax, though it is by the per-unit tax. The property tax won't change the optimal Q but the per-unit tax will.
d. Since both taxes alter the cost curves (in different ways), they both necessarily alter the optimal Q for the company.

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Do Applied Problem #4 on page 359-360 about the MorTex Company:

The MorTex Company assembles garments entirely by hand even though a textile machine exists that can assemble garments faster than a human can. Workers cost $50 per day, and each additional laborer can produce 200 more units per day (i.e., marginal product is constant and equal to 200). Installation of the first textile machine on the assembly line will increase output by 1,800 units daily. Currently the firm assembles 5,400 units per day.

Question 6

The financial analysis department at MorTex estimates that the price of a textile machine is $600 per day. Can management reduce the cost of assembling 5,400 units per day by purchasing a textile machine and using less labor?

a. Yes. The machine allows the company to cut its labor force roughly in half, from 27 workers down to 15 workers. The cost of the 27 workers is more than the cost of the machine and 15 workers.
b. No. The purchase of the machine only reduces the company's labor requirement from 27 workers down to 24 workers. The cost of the 27 workers is less than the cost of the machine and 24 workers.
c. Yes. The machine allows the company to cut its labor force from 27 workers down to 18 workers. The cost of the 27 workers is more than the cost of the machine and 18 workers.
d. No. Without the machine, the company needs 27 workers to produce 5,400 units; with the machine, the company needs 18 workers to produce that amount. The cost of the 27 workers is less than the cost of the machine and 18 workers.

Question 7

The Textile Workers of America is planning to strike for higher wages. Management predicts that if the strike is successful, the cost of labor will increase to $100 per day. If the strike is successful, how would this affect the decision to purchase a textile machine?

a. The strike increasing wages means that workers are more valuable and productive than they were previously. The machine is less desirable to the company now and should not be purchased.
b. It doesn't affect the decision. The company still would not find it beneficial to purchase the machine, even at the higher wage.
c. It doesn't affect the decision, because the company preferred to purchase the machine even before the strike raised wages. The higher wage only serves to make the machine purchase more financially sound.
d. The machine replaces 9 workers, but the higher wage now means that the cost of 27 workers exceeds the cost of the machine and 18 workers. The company should purchase the machine if the strike is successful.

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You work for a company that is being accused of monopoly behavior, given its large size. Comparisons are made to the industry standard (http://censtats.census.gov/cgi-bin/cbpnaic/cbpsect.pl), where each establishment has on average about 15.8 employees. Your company is quite a bit bigger than that, but you want to provide evidence against the monopoly charges.

You've collected data at different times in your company's history, when you had different amounts of capital.

In 1990, SRATC = 1.875Q2 - 18.75Q + 116.88

In 2000, SRATC = 1.875Q2 - 56.25Q + 500

In 2010, SRATC = 1.875Q2 - 37.5Q + 237.5

Question 8

After plotting these three different SRATC curves (have Q go from 0 to 20), what do you notice about how your company's size and costs have changed as time has gone on?

a. In 1990, the firm was relatively small with medium costs. In 2000, the firm expanded significantly, but costs were even higher than 1990. In 2010, the firm settled into a medium size and had the lowest costs of any of the years.
b. As the years went on, the firm expanded its size and enjoyed lower costs (2010's costs were lowest and 1990's costs were highest).
c. The firm enjoyed its lowest costs in 2000 and its highest costs in 2010.
d. Even though it expanded its size as time went on, the firm enjoyed lowest costs in 1990.

Question 9

Make another column labeled "LRATC" that includes three points: 1990's SRATC when Q = 2; 2000's SRATC when Q = 18, and 2010's SRATC when Q = 10. Plot a 2nd-degree polynomial trendline to represent your company's LRATC.

In a more competitive industry with smaller firms, typical LRATC curves follow LRATC = (100/18)Q2 - (100/3)Q + 100. Using all available information in this question, which would be a good argument that could be used to justify your company's size?

a. Our firm may be bigger than average, but our costs are just as low as smaller, more competitive firms.
b. Our firm's costs are significantly lower than costs of the smaller, more competitive firms.
c. While our costs are higher than competitive firms, we are actually smaller in scale than they are.