macro economics 1. (TCO A) Suppose you are hired to manage a small manufacturing facility that produces Widgets. (a.) You know from data collected on the Widget Market that market demand has recently...

Answer to 1:
(a)
Due to decrease in market demand, demand curve would shift leftward (from DD1 to DD2) and
due to increase in market supply, market supply curve would shift rightward (from SS1 to SS2).
Consequently, market price would fall (from P1 to P2) but the effect on market quantity is
ambiguous as shown in figure1. Since market price has fallen, the manager should reduce its
production levels and the price charged.
Figure1:
(b)
Due to fall in the price of substitute goods, demand of given good [widget] will decrease, shifting
the demand curve to the left (from DD1 to DD2). But due to fall in production cost, profitability
of producer will go up and therefore they would supply more and market supply curve will shift
ightward [as represented in the figure2 below]. The net effect is that price of widget will go
down (from P1 to P2) whereas the effect on equili
ium quantity of widget is unclear as it will
depend on the relative magnitude of the shift of the two curve.
figure2:
Given that market price has fallen, the manager should reduce its production levels and the price
charged.
Answer to 2:
Price (P)
Quantity
(Q) Total revenue = P*Q Marginal revenue
10 100 1000 10
8 200 1600 6
6 360 2160 3.5
4 600 2400 1
2 1000 2000 -1
(a)
Demand elasticity of demand = ( )




Here P1 = 6, P2 = 8, Q1 = 360 and Q2 = 200
So price elasticity of demand = ((200-360)/360)*(6/(8-6)) = -1.33
(b)
Marginal revenue (MR) is defined as the ratio of change in total revenue and change in quantity.
Change in total revenue (when output changes from 600 to 1000) = -400 (refer the table above)
and change in quantity = 400
So marginal revenue = change in total revenue/change in quantity = -400/400 = -1
Answer to 3:
Workers
Total
labor cost
Marginal
cost Output
Marginal
product
total
evenue
Marginal
evenue
1 200 4 50 50 350 7
2 400 2.22222222 140 90 675 3.611111111
3 600 2.5 220 80 1120 5.5625
4 800 4 270 50 1570 9
5 1000 6.66666667 300 30 1865 9.833333333
6 1200 13.3333333 315 15 2070 13.66666667
7 1400 40 320 5 2170 20
(a)
Marginal production second worker = output co
esponding to second worker – output
co
esponding to first worker = 140-50 = 90
(b)
Marginal revenue product of the fourth worker = marginal revenue co
esponding to 4
th
worker*
marginal product worker to 4
th
worker = 9*50 =450 [refer the table above]
(c)
Marginal cost of first worker = total labor cost co
esponding to 1
st
worke
output co
esponding
to first worker = 200/50 = 4
(d)
The firm should continue to hire the labor as long as marginal revenue exceeds marginal cost.
We can note from the table above, till 6
th
worker, marginal revenue exceeds marginal cost but
after that it has become less than marginal cost. So the firm should hire 6 workers to maximize
the profit.
Answer to 4:
The table below shows the total cost and marginal cost at each level of output.
Output TFC TVC Total cost
Marginal cost
(MC)
0 30 0 30
1 30 70 100 70
2 30 120 150 50
3 30 150 180 30
4 30 200 230 50
5 30 270 300 70
6 30 360 390 90

(a)
Product price = $60
We note from the table above that till 4 units of output, the price (=$60) exceeds marginal cost
ut after than it is less than the marginal cost. So this firm, at the optimal, would produce 4 units
of output.
At price = $60 and optimal output = 4, total revenue = P*Q = 4*60 = $240
And total cost (when output is 4) = $230 [refer the table]
So profit = total revenue – total cost = 240-230 = $10
This implies that at price =$60, firm is...