1.

You are the owner and also manager of traditional wooden toys producer for Singapore
market. In the short run, your firm can vary the amount of labor it employs. Your firm’s
fixed costs are $200. Your firm’s short run production function is given in the table below.
Complete the table below.
(6 marks)
Labor Output Marginal Average Average Total Average Total Average Marginal
Input Product Product Fixed Variable Variable Cost Total Cost
of Labor of Cost Cost Cost Cost
Labor
1 18 30
2 37 50
3 57 80
4 76 30
5 94 34
6 111 230
7 127 300
8 142 47.5
9 156 470

2. A Honda CR-V costs $137,000 and has an average gas mileage of 24 mpg. A Honda HR-V
costs $99,000 and has an average gas mileage of 28 mpg. Assuming gasoline costs $6 per
gallon, calculate total cost equations as a function of miles driven for each of these cars
and identify fixed and variable costs. How many miles do you have to drive before the two
cars have the same total cost? (3 marks)
3. Isaac, a woodworker, builds wooden dining table using both labor (L) and equipment (K).
His production function for dining table is a Cobb-Douglas production function: Q=6K1/3L2/3.
a) Currently, Isaac has 27 units of equipment. His workshop is capable of housing up to
30 employees. What is Isaac’s short run production function? (2 mark)
b) Graph the production function you found in (a), with labor on horizontal axis and
output on the vertical axis. (2 marks)
c) Determine the average and marginal products of labor at each level of labor you
worked with in (b). (2 mark)
d) Suppose that overnight, 19 of Isaac’s equipment break down and cannot be operated,
show what happens to the total, marginal, and average products of labor as a result. (2
mark)
4. Jody’s Frozen Yoghurt shops have enjoyed rapid growth in eastern part of the island in
recent years. From the analysis of Jody’s various outlets, it was found that the demand
curve follows this pattern:
Q = 200 - 300 P + 120 I + 65 T -250 Ac + 400 Aj where
Q = Number of cups served per week
P = Average price paid for each cup
 I = Per capita income in the given market (thousands)
T = Average outdoor temperature
Ac = Competition’s monthly advertising expenditures (thousands)
Aj = Jody’s own monthly advertising expenditures (thousands)
One of the outlets has the following conditions: P = 1.50, I = 10, T = 30, A c = 15, Aj = 10.
a) Estimate the number of cups served per week by this outlet. Also determine the
outlet’s demand curve. (2 marks)
b) What would be the effect of a $5,000 increase in the competitor’s advertising
expenditure? Illustrate the effect on the outlet’s demand curve? (2 marks)
c) What would Jody’s advertising expenditure have to be to counteract this effect? (1
mark)
5. Suppose firm T’s utility function is: U(X,Y) = X0.4Y0.6. The firm has a budget of $100, and the
price of material Y is $20 and the price of X is $10.
a) What is the optimal combination of inputs of X and Y for this firm? (1 mark)
b) Suppose the price of Y and X are now $10 and $20, respectively. What effect will this
have on the firm’s optimal input combination? (1 mark)
c) Illustrate the answers to the preceding questions with the use of isoquant/isocost
diagram. (2 marks)
6. The economist for the ABC Car Manufacturing Corporation has calculated a production
function for the manufacture of their SUV cars as follows: Q = 1.3 L 0.75K0.3 where Q is
number of cars produced per week, L is number of labor hours per day, and K is he daily
usage of capital investment.
a) How many cars will be produced per week with the following amounts of labor and
capital (2 marks)
LABOR CAPITAL
100 50
120 60
150 75
200 100
300 150
b) If capital and labor both are increased by 10 percent, what will be the percentage
increase in quantity produced? (1 mark)
c) Assume only labor increases by 10 percent, what will be the percentage increase in
production? What does this result imply about marginal product? (1 mark)
d) Assume only capital increases by 10 percent. What will be the percentage increase in
production? (1 mark)
e) How would your answers change if the production function were Q = 1.3 L0.7K0.3
instead? What are the implications of this production function? (3 marks)
7. The manufacturer of high-quality flatbed scanners is trying to decide whether or not they
have achieved their performance goal. The cost function for this company is estimated to
be as follows: TC = 40 + 50Q + 5Q2
a) What are the manufacturer’s average total cost, average variable cost, and marginal
cost? (2marks)
b) Find the quantity that minimizes ATC. (2 marks)
c) Show that ATC = MC when ATC is minimized (2 marks)