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# Economics of Enterprise – Q&A

804Questions:

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A firm produces the following units of output, Q, by hiring a fixed quantity of
capital, K, and labour, L, as follows:
L: 8, 16, 24, 32, 40, 48, 56, 64, 72, 80
Q: 16, 36, 65, 97, 137, 177, 209. 233, 249, 257
APL: 0.50, 0.44, 0.37, 0.33, 0.29, 0.27, 0.27, 0.27, 0.29, 0.31
MPL: - , 0.40, 0.28, 0.25, 0.20, 0.20, 0.25, 0.33 , 0.55 , 1.00

a. Assuming that the cost of capital is $1,000 and labour costs$10.00 per hour,
determine the total variable cost, average variable cost and the marginal cost
of the firm for the output levels given above.

b. Provide rough graphs of the TVC, AVC and MC curves and compare their
behaviour with the product curves in part b. Be sure to label your axes
correctly.

Widgets are provided by a competitive constant-cost industry where each firm has fixed costs of $30. The following chart shows the industry-wide demand curve and the marginal cost curve of a typical firm: (Industry-Wide Demand ) - ( Firm’s Marginal Cost Curve) : (Price - Quantity ) / (Quantity- Marginal Cost ) : - ($5 -1500) / ( 1 - $5 ). - (10 - 1200 ) / (2 - 10 ). - (15 - 900 ) / ( 3 - 15 ). - (20 - 600) / ( 4 - 20). -(25 - 300) / (5 - 25). -(30 - 200) / (6 - 30). -(35 - 140)/ (7 - 35). -(40 - 50) / ( 8 - 40). a.What is the price of a widget? b. How many firms are in the industry? For the remaining four parts of this question, assume that the government imposes an excise tax of$15 per widget.
c. In the short run, what is the new price of widgets?
d. In the short run, how many firms leave the industry?
e. In the long run, what is the new price of widgets?
f. In the long run, how many firms leave the industry?
Other things remaining the same, what would happen to the supply of a particular commodity if the following changes occur?
a. The price of the commodity decreases.
b. A technological breakthrough enables the good to be produced at a significantly lower cost.
c. The price of inputs used to produce the commodity increases.
d. The price of a commodity that is a substitute in production decreases.
e. The managers of firms that produce the good expect the price of the good to rise in the near future.
f. Firms in the industry purchase more plant and equipment, increasing the productive capacity in the industry.
Mighty-lite inc., a manufacturer of plastic tables for institutional use is considering a capital spending program involving annual expenditures of 100,000 for each of the next five years. the firm estimates that its annual profit of 100,000 would increase by 50 percent when the capital program was completed. assuming the firm has a 20-year life and the appropriate interest rate is 12 percent, should the capital spending program be implemented?
A recent MPA graduate looking is looking for an apartment in the Washington area. She would like to have a spacious apartment but also plans to use enough heating and air-conditioning to be comfortable in winter and summer. She knows from experience that she will use one kilowatt-hour (kwh) of electricity, on average, per square foot of floor space per month. Rents in the neighborhood where she would like to live are $0.90 per square foot per month, and electricity costs$0.10 per kwh.
a. Assuming she has $1000 a month to spend on rent and utilities, draw her budget constraint and a couple of her indifference curves. Show her equilibrium and calculate how many square feet of apartment space and kwh of electricity she consumes. b. Now suppose she gets a promotion and can afford to spend$1500 on rent and utilities. Show her new equilibrium and calculate her consumption of each good.

Tawil Plant Foods, Inc. estimated the demand elasticities for the organic yoghurt, a product that they distribute nationally. They found that the price elasticity of demand (EP) is -4, the income elasticity of demand (EI) is 2, the cross-price elasticity of demand (EYK) with respect to the price of the King yoghurt is 1.5, the cross-price elasticity of demand with respect to the price of PrimoPlants Mix nuts (ESM) is -2, and the demand elasticity with respect to advertising expenditures (EA) is 5.
The current price of Tawil's yoghurt is $29.95, per capita income is$11,000, the price of King's yoghurt is $39.99, the price of Mix nuts is$8.45, and advertising expenditures are $84,000 per month. If Tawil increases its price of yoghurt by 10%, per capita income rises by 5%, the price of King's yoghurt increases by 4%, and the price of Mix nuts falls by 2%, by how much will advertising expenditures have to change in order to keep the sales of Tawil's yoghurt from changing? Question: Widgets are provided by a competitive constant-cost industry where each firm has fixed costs of$30. The following chart shows the industry-wide demand curve and the marginal cost curve of a typical firm: (Table Below);
Industry-Wide Demand// Firm’s Marginal Cost Curve
Price- Quantity / Quantity- Marginal Cost
$5 - 1500 / 1 -$5
10 - 1200 / 2 - 10
15 - 900 / 3 - 15
20 - 600 / 4 - 20
25 - 300 / 5 - 25
30 - 200 / 6 - 30
35 - 140/ 7 - 35
40 - 50 / 8 - 40
a.What is the price of a widget?
b. How many firms are in the industry?
For the remaining four parts of this question, assume that the government imposes an excise tax of \$15 per widget.

c. In the short run, what is the new price of widgets?
d. In the short run, how many firms leave the industry?
e. In the long run, what is the new price of widgets?
f. In the long run, how many firms leave the industry?
How much does it cost to practice medicine?
Are malpractice insurance premiums a major cause of higher doctor bills?
Is medical care sold like other goods and services?
Who chooses which treatment to use, the patient or the doctor?
Why are licensure restrictions more strongly enforced for some types of medical
care than for others?
Is the American Medical Association (AMA) a professional society serving science
or a union serving the economic interests of its members? Is it both?
Question 8
Suppose the demand curve for a good is given by the equation Q = 100 - P and the supply curve is given by the equation Q = 0.25P, where P represents the price of the good (measured in dollars per unit) and Q represents the quantity of the good (measured in units per week).

a. Find the equilibrium price and quantity for this market.

b. Suppose quantity demanded for the good rises by 10 units at every possible price while at the same time quantity supplied falls by 5 units at every possible price (with the exception that quantity supplied cannot drop below zero units at any price). Find the new equilibrium price and quantity in this market.

c. Given the change in demand, how large would the fall in supply need to be (given the same 10 unit rise in demand) in order for the price to decrease instead of increasing as in part (b)?
Question:
Suppose labour is a variable input and capital is a fixed input, and consider a firm's short-run average, average variable, and marginal cost curves.

a. What geometric relationships hold among these three curves?

b. How would these curves be affected by an increase in the wage rate paid to labour?

c. How would these three curves be affected by an increase in the rental rate paid to
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