ECON 101 King Fahd University of Petroleum Draw the Supply Curve Economics Questions

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ECON101 HW3
Deadline: Saturday October 30th at 11:59 PM
Name:
Student ID:
Please submit your solution on Blackboard
Please show all your steps and write legibly
Question 1 (10 points):
If K is capital measured by number of machines and is fixed at 10 machines in the short-run, L is labor
measured by variable worker-hours, Q is the output, the cost of capital is $100 per machine, and the cost
of labor is $5 per hour.
(a) (4 points) fill the following table:
K
(Number
of
machines)
L
(workerhours)
Q
(Total
Product)
10
10
10
10
10
10
20
30
40
50
100
240
540
640
700
AP
(Average
Product)
MP
(Marginal
Product
per
workerhour)
Total
capital
cost
AFC
(Average
Fixed
Cost)
Total
Labor
Cost
AVC
(Average
Variable
cost)
TC
(Total
Cost)
ATC
(Average
total
cost)
(b) (2 points) In one graph, draw curves of the Average Product and the Marginal Product. (The
horizontal axis should be worker-hours (L) and the vertical axis should be output per unit of
worker-hours).
Page 1 of 6
MC
(Marginal
Cost)
(c) (2 points) From the graph in b, describe the relationship between MP and AP.
(d) (2 points) Which of the following statements is true about the relationship between MC and
AVC?
a. If MC is rising, then AVC is rising.
b. If MC is constant, then AVC is falling.
c. If MC is above AVC, then AVC must be rising.
d. If MC is above AVC, then AVC must be falling.
e. If MC is below AVC, then AVC must be rising.
Question 2 (10 points):
The market price of a car is SAR 10,000. Each machine costs SAR 150,000 and each labor costs SAR
150,000. A car producer ABCÂ’s production schedule is as below.
The Production Function (Output)
Number of Machines
Labor
0
1
2
3
4
0
0
0
0
0
0
1
0 30 51
67
80
2
0 51 71
87 101
3
0 67 87 103 117
4
0 80 101 117 130
5
0 92 113 128 142
5
0
92
113
128
142
154
(a) (4 points) Consider short run. ABC has 3 machines. Fill the table below and answer the following
questions.
Labor
Output
TFC
TVC
MC
Car Price
Total Revenue
TC
Profit
0
1
2
3
4
5
(Remark: MC=?C/?Q. Assume the MC of in between each two output levels in the table to be the same. E.g., the MC of the first car is the
same as the MC of the 12th car.)
Page 2 of 6
i). (1 point) How many cars will ABC produce and sell to maximize its profit?
ABC will produce
cars.
ii). (1 point) How much profit will it make?
The profit is
.
(b) Consider the long run.
i). (1 point) Fix the number of labor to be 4. What is the Marginal Product of Capital of the 5th machine?
?????? =
.
ii). (1 point) Fix the number of machines to be 4. What is the Marginal Product of Labor of the 5th labor?
?????? =
iii).
.
(1 point) What is the output of the firm in the long run with 4 labor and 4 machines?
?????? =
.
iv). (1 point) Suppose the firm decided to produce 100 cars. If the firm finds at its current labormachine combination
??????
????
>
??????
????
The firm should increase
, what should the firm do?
and decrease
Page 3 of 6
.
Question 3 (6 points): Using the production function:
?? = 20?? 0.25 ??0.75
where K is machine-hours per week, L is worker-hours per week, and Q is output per week.
For this production function:
?????? = 5?? ?0.75 ??0.75
?????? = 15?? 0.25 ???0.25
Suppose that capital is $5 per machine-hour and labor is $5 per worker-hour. What would be the cost
minimizing combination of capital and labor that could be used to produce 20 units of output.
Show all your steps
Page 4 of 6
Question 4 (9 points):
Suppose firm A and firm B sell product X in a perfectly competitive market. The following figure shows
the marginal cost and average variable cost curves for both firms:
(a) (3 points) Draw the supply curve for firm A.
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(b) (3 points) Draw the supply curve for firm B.
(c) (3 points) Draw the supply curve for both firms.
Page 6 of 6

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