Division of Economics

School of Humanities and Social Sciences

NANYANG TECHNOLOGICAL UNIVERSITY

HE 1001 Principles of Microeconomics

Tutorial 8

1. Singapore Metal Company produces brass fittings. Their engineers, with the help of
economists, estimate the production function represented below as relevant for their
long-run capital labour decisions.

Q = 500L0.6K0.8

Where Q = annual output measured in pounds, L=labour measured in person hours,

K=capital measured in machine hours. Singapore Metal's employees are relatively highly
skilled and earn S$15 per hour. The firm estimates a rental charge of S$50 per hour on
capital. Davy forecasts annual costs of S$500,000 per year.

a. Determine the firm's optimal capital labour ratio, given the information above.

b. How much capital and labour should the firm employ, given the $500,000 budget?
Calculate the firm's output.

c. Singapore Metal is currently negotiating with a newly organized union. The firm's
personnel manager indicates that the wage may rise to $22.50 under the proposed
union contract. Analyze the effect of the higher union wage on the optimal capital
labour ratio and the firm's employment of capital and labour. What will happen to
the firm's output?

2. True Suppose that ACME corporation has a production function Q=10L 0.5K0.5, and face a
wage rate of $1000 per week, and a capital price of $250 per week per unit. Suppose
that they initially produce 100 units per week using the least-cost input combination for
producing that output level.
a. Derive the MPL, MPK, and check the returns to scale of the production function.
b. What is their total cost?
c. What is their short-run cost function if their capital is fixed (at 20 units) in the short
run?
d. What is their long-run cost function if both inputs can be varies?

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3. True or False? The demand curve facing a perfectly competitive firm is the same as its
average revenue curve and its marginal revenue curve, and the firm will maximize profit
at P=MC. Use graph to explain your answer.

4. Suppose you are the manager of a firm operating in a competitive market. Your cost of
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production is given by C = 200 +2 q , where q is the level of output and C is total cost. The
fixed cost of production is $200.
a. If the price of the product is $100, how many units of product should you produce
to maximize profit?
b. What will the profit level be?
c. At what minimum price will the firm produce a positive output?