Econ 302 Homework #3 Due in class Monday, March 23rd Name ______________________________________________________ ID # ________________________________________________________ 1. (20 points)Suppose in the short run a perfectly competitive firm has variable cost = 6q2, and MC = 12q where q is the quantity of output produced. Also, the firm has fixed cost F = 6144. a) (4 points) If the market price of the product is $336, how much output should the firm produce in order to maximize profit? b) (4 points) How much profit will this firm make? c) (4 points) Given your answer to b), what will happen to the market price as we move from the short run to the long run? d) (4 points) What is the break-even price for this market?. 2. (21 points) Suppose a firms production function is given by Q = L1/2*K1/2. The Marginal Product of Labor and the Marginal Product of Capital are given by: MPL = , and MPK = . a) Suppose the price of labor is w = 25, and the price of capital is r = 4. Derive the firms total cost function. b) What is the firms marginal cost? c) For this problem, you will sketch the graph of the firms isoquant for Q = 10 units of output, and on the same graph sketch the firms isocost line associated with the total cost of producing Q = 10 units of output. To get this total cost, you must use the Total Cost function from part a). Please scale your graph up to 100 units of Labor on the horizontal axis, and 100 units of Capital on the vertical axis (do not go above 100 units on either axis). For the isocost line, clearly identify the vertical and horizontal intercepts. For the isoquant, clearly identify 4 combinations of Labor and Capital that will produce Q = 10 (including the bundle that minimizes the firms cost of production). Make sure your graph is neatly and accurately drawn and carefully labeled. 3. (9 points) Suppose the Demand for baseballs is given by Q = 240 8P. a) What is the price elasticity of demand when P = 6? b) At what price will Total Revenue be maximized? c) What is the firms Marginal Revenue when the price is $5?
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