ECON 302

Econ 302                              Homework #3                                       McLeod

Due in class Monday, October 27th

Name ______________________________________________________

ID # ________________________________________________________

Instructions: Please Read Carefully

Please print out this form.  There should be four separate sheets of paper (including the cover sheet).  After you have written your answers, please staple the four sheets together at the top left-hand corner. 

The first sheet is intended only as a cover sheet.  Do not write anything on the first sheet except your name and ID #.

Please answer each question on the page provided.  If you need extra space, you may use the back of the sheet.

There are 50 possible points on this homework assignment.  You may work together, but you MUST WRITE UP YOUR OWN WORK and TURN IT IN, IN PERSON, AT THE BEGINNING OF CLASS on Monday, October 27th.  Late homework will not be accepted.

PLEASE STAPLE YOUR HOMEWORK!!

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 firm’s production function is given by Q = L^1/2*K^1/2. The Marginal Product of Labor and the Marginal Product of Capital are given by:

MP_L = , and MP_K = .

a)  Suppose the price of labor is w = 25, and the price of capital is r = 4.  Derive the firm’s total cost function.

b)  What is the firm’s marginal cost?

c) For this problem, you will sketch the graph of the firm’s isoquant for Q = 10 units of output, and on the same graph sketch the firm’s 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 firm’s 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 firm’s Marginal Revenue when the price is $5?