Problem

1
Problem 1

• The following table shows total output (in tax
  returns completed per day) of the accounting firm
  of Hoodwink and Finagle
• a. Calculate the marginal product of each
  accountant.
• b. Over what range of employment do you see
  increasing returns to labor?
• c. Explain why MPL might behave this way in the
  context of an accounting firm.

2
Problem 2 of Chapter 7

• Until recently, your early salary was 35,000.
  To open you own business you quit your job, cash
  in a 10,000 savings account (which pays 5
  interest), and use the money to buy a business.
  You also convert a basement apartment in your
  house, which you have been renting for 250 a
  month, into a workspace. You lease some office
  equipment for 3,600 a year and hire two
  part-time programmers, whose combines salary is
  25,000 a year. Utilities cost around 50 a
  month.
• a. Annual explicit cost?
• b. Annual implicit cost?
• c. At the end of 1st year your total sales were
  55,000 and your accountant congratulates you.
  Good or bad?

3
Problem 3
SR and LR total cost curves are given. a.
Which column give SR TC and LR TC? c. At what
output level firms SR and LR input mixes will be
the same? d. Starting from producing two
units, management decided to double production to
four units. So they simply doubled all of their
inputs in the long run. Comment.
e. Over what range of output do you see
economies of scale, diseconomies of scale, and
constant returns to scale?
4
Problem 5

• Ludmillas house of Schnitzel is currently
  producing 10 schnitzels a day at point A. Her
  business partner, Hans, wants her to double
  production immediately.
• a. What point will likely illustrate Ludmillas
  cost situation for the near future? Why?
• b. If Ludmilla wants to keep producing 20
  schnitzels, at what point does she want to be
  eventually? How can she get there?

c. Eventually, Ludmilla and company do very
well, 70 schnitzels a day. But after a few
years, Ludmilla discovers that profit was greater
when she produced 20 schnitzels per day. She
wants to scale back production to 20 schnitzels
per day, laying off workers, selling off
equipment, renting less space, and producing
fewer schnitzels. Hans wants to reduce output by
just cutting back on flour and milk and laying
off workers. Whos right? d. Does the
figure tell us what output Ludmilla should aim
for?
5
Problem 6

• a. Over what range of output firm experiences
  increasing marginal returns to labor? Decreasing
  MPL?
• b. As output increases, do AFC behave as
  described in the text?
• c. As output increases, do MC, AVC, and ATC
  behave as described in the text?
• d. Looking at the numbers, without graph, is
  the relationship between MC and AVC as described
  in the text? What about the relationship between
  MC and ATC?