PleaseanswerTrueorFalse,andexplainyouranswer. Aconsumerpurchases...

1.
(5 points) Please answer True or False, and explain your answer. A consumer purchases

a book by driving across town to a bookstore, standing in line for five minutes to pay thec
ashier, and then pays $5. The same book is purchased by another consumer who
spends two minutes placing the order over the Internet for $10. The book necessarily
cost the first consumer less.
Answer:
The statement is „false‟ because we are not considering the real cost of purchasing by the
first consumer. The first consumer although gets the book at lower price than second
consumer but he/she incurs other costs as well such as; cost of time, cost of driving own
vehicles, and loss of energy and dissatisfaction while standing in line to purchase the
ook. Including these costs in the price of book would give us the real cost of purchasing
the book by the first consumer.
This real cost of purchasing (by the first consumer) might be less than or greater than the
price of book purchased online by the second consumer (i.e. $10). If this is greater than
$10, the book will cost the first consumer more and if it is less than $10, the book will
cost the first consumer less.
So the initial statement that “the book necessarily cost the first consumer less” is false.
2.
(10 points) Evan wants to go into the donut business. For $500 per month he can rent a
akery complete with all the equipment he needs to make a dozen different kinds of
donuts (K = 1, r = 500). He must pay unionized donut bakers a monthly salary of $400
each. He projects his monthly production function to be Q = 5KL, where Q is tons of
donuts.
a. With the cu
ent level of capital, what is the marginal product of labor? Is the
marginal product diminishing? Explain.
Answer:
At K = 1, production function is given as:
Q = 5L
Marginal production of labor (MP
L
) = dQ/dL = 5
We note that marginal product of labor is constant at 5. So it is not diminishing.
. If Evan wishes to make 25 tons of donuts, how many bakers are required given
the cu
ent level of capital? How much will it cost to produce this (total cost)?
Answer:
Even want Q to be 25 i.e.
5L = 25, implies number of bakers required (L*) = 5
Total cost = salary of each bakers*number of bakers = 400*5 = $2000
c. Derive Evan‟s short‐run cost function with K = 1.

Answer:
Total cost function (TC) = cost of capital + salary of each bakers*number of bakers =
500 + 400*L ….. (1)
Production function: Q = 5L, implies L = (Q/5) …… (2)
Substituting (2) in (1), we get short-run cost function as;
TC = 500 + 400*(Q/5) = 500 + 80Q
d. Derive the marginal cost curve from your answer to (c) and show the relationship
etween the marginal cost and marginal...