Tutorial 03 Answers PDF

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Tutorial Three: Answers 1. Australian government issues a so-called “Basic Card” to people who are under income management. Suppose that, in the absence of basic card, the average consuemr must divide $500 in monthly income between food and all other goods such that the following budget constraint holds: $10*A+$5*F=$500, where A is the quantity of all other goods and F is the quantity of Food. a. Draw the initial budget line in the absence of basic card, using vertical axis for all other goods and horizontal axis for food. b. Assuming a person who has basic card can only use it to buy food, and the value of that card is $250. Illustrate the new budget line, and discuss whether the consumer will be better off with basic card. c. A survey on the users of basic card revealed a high level of dissatifaction regarding the card. Use the model to illustrate that consumers can achieve high level of happiness if they can be handed over $250 instead of $250 basic card. As shown in the figure below, the blue line is the original BL, and the red line is the BL with card. The consumer is better off with the card with free food, but can reach a higher IC with cash, which shift the BL to the green line.

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2. The following table summarizes the short-run production function for your firm. Your product sells for $5 per unit, labor costs $5 per unit, and the rental price of capital is $20 per unit. Complete the following table, and then answer the accompanying questions (VMP is the value of marginal product, VMP=Price of the product*MP).

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a. Which inputs are fixed inputs? Which are the variable inputs? b. How much are your fixed costs? c. What is the variable cost of producing 20 units of output? d. How many units of the variable input should be used to maximize profits? e. What are your maximum profits? f. Over what range of variable input usage do increasing marginal returns exist? g. Over what range of variable input usage do decreasing marginal returns exist? h. Over what range of variable input usage do negative marginal returns exist?

a. Labor is the fixed input while capital is the variable input. b. Fixed costs are (5)($5) = $25.

c. Assume that capital is indivisible, (that is, it must be rented in an integer number of units). Then the required variable cost is (2)($20), which equals $40. d. Using the VMPK = r rule, six units of capital should be used to maximize profits. e. The maximum profits are ($5)(95) - ($20)(6) - ($5)(5) = $330. f. There are increasing marginal returns when K is less than or equal to 3. g. There are decreasing marginal returns when K is greater than 3. h. There are negative marginal returns when K is greater than 7.

3. The total costs for Morris Industries are summarized in the following table. Based on this information, fill in the missing entries in the table for fixed cost, variable cost, average fixed cost, average variable cost, average total cost, and marginal cost.

4. The point where diminishing marginal returns has begun to affect production is best characterized by the point where the: A. B. C. D.

total product curve flattens out. average product curve begins to be negatively sloped. marginal product curve begins to be negatively sloped. marginal product curve equals the average product curve.

5. For the cost function C(Q) = 50 + 4Q + 2Q2, the total variable cost of producing 7 units of output is: A. B. C. D.

32. 102. 126. None of the answers are correct....