Question 5 and 6

ECON 3310 – Microeconomics Spring 2021 – David Quigley

Group Report 3 – Due Monday, April 19th

Write a minimum of 4 pages, double-spaced, answering the questions below. If you include figures, those count towards the page minimum. Be as specific as possible and always include explanations that describe your reasoning.

Suppose you’re writing a report for the CEO of a theme park entertainment company. The CEO has the following questions she would like analyzed and answered as well as possible.

1. The company is considering production decisions in the short-run and the long-run. In economics, what defines the short-run period from the long-run period? How do the considerations and actions available in the short-run differ from those in the long-run? How might these differences affect production decisions?

2. What are Returns to Scale in relation to the production function? How could you go about evaluating the Returns to Scale for a particular production process? How could you determine if it is Increasing Returns to Scale, Decreasing Returns to Scale, or Constant Returns to Scale?

a. What is the Returns to Scale for the production function Q = 12L + 15K, and explain how you determined it?

b. What is the Returns to Scale for the production function Q = 27L2K, and explain how you determined it?

3. What is Marginal Revenue and how do you calculate it? Suppose the Price Elasticity of

Demand in the market for theme park entertainment is −1.34. If the CEO is interested in increasing revenue, how should the company adjust the price it charges for entry into its theme parks, and hence, the quantity of tickets sold? What is the relationship, in general, between the Price Elasticity of Demand and Total Revenue?

4. What is the difference between Variable Costs and Fixed Costs? What goes into

calculating Total Costs?

a. If the Total Cost function is TC = 4Q3 – 33Q2 + 48Q + 2,600, what are the Variable Cost function, Fixed Costs, Average Total Costs, and Average Variable Costs?

5. What is the Law of Diminishing Marginal Returns? What factors determine the Demand

for Labor? What is the relationship between the Law of Diminishing Marginal Returns and the Demand for Labor in the short-run?

a. What factors shape the Supply of Labor? What causes the Supply of Labor to be upward sloping?

6. How do the assumptions behind Perfect Competition affect the structure of the market? What is the relationship between the market price and the firm’s demand curve? What is the profit maximizing quantity for a firm under Perfect Competition? What are the conditions that govern whether a firm should operate in the short-run or not?