1. Second Exam Economics 310 Fall 2000 Professor Kenneth Ng COBAE
California State University, Northridge

2. Fill in the empty cells in the table.

3. Capital C D A B 100 Units 50 Units 25 Units Labor 25 50 500
Draw iso-output and iso-cost curves for the three quantities from the table above. Make sure your graph is accurate. You should have three iso-output curves? 1.     Is the firm producing efficiently at each of the three quantities? Explain and show on your graph. 2.     Is the firm output maximizing at each level of output? Depict what would happen to the firms’ total cost if output maximized? What would happen to ATC? Explain. 3.     Why would a firm produce without output maximizing? Explain.
No. The amount of capital is fixed in each of the three columns. The table shows how the firm would expand or contract output in the short run when capital is fixed (points D, A, and B).
The firm is not maximizing output. Moving from B to C would allow the firm to produce more output with the same total cost.
The firm would produce in the short run at a point like B if they are faced with an unexpected increase in demand and have to increase output in the short run.
Capital C D A B
100 Units
50 Units
25 Units
Labor 25 50
500

4. Locate the three quantities on the graph below
Locate the three quantities on the graph below. Suppose the price of labor were to rise 25%. Depict this change on your graph.

5. Show the short and long run effect of the drop in the price of labor on the graph below. Provide of brief narrative.
The increase in the MC curve of existing firms means that at each price, existing firms will be producing less.
This is captured by the shift of the short run supply curve to the left.
In the short run, prices will rise and the quantity produced will fall.
Because prices have risen, the existing firms will be losing money.
In the long run, some firms will exit the industry. The short run supply curve will continue to shift the the left until the price has risen to the new min ATC of production.

6. What is the three-part output rule of firm in a price takers market
What is the three-part output rule of firm in a price takers market? Explain fully the logic behind each part of the rule.
Will a firm ever produce at a loss? Explain.
Yes. In the short run if the price is above the min AVC but below the min ATC the firm will produce even though it is losing money by doing so.
The price is high enough to cover the firms variable costs and partially offset its’ fixed costs.
Therefore it will lose less in the short run by producing rather than shutting down.
Will a firm ever produce when MC is falling. Explain.
No. If MC is falling the firm can always lose or make more by expanding output.
If at the current output, P=MC and if the firm produced one additional unit they will be able to earn a profit on the marginal unit.
When MC is below AVC, what will happen to AVC as output expands?
AVC will fall. Whenever the marginal is below the average, the average will be falling.

7. Consider the following article
Consider the following article. The graphs below depict the computer memory market in long run equilibrium before the fire. For full points, you must show and fully label the effects on all relevant graphs Show the effect of “the trend in upgrading the power of personal computers.” 2. Provide a brief narrative of events

8. Copyright 1993 The Washington Post The Washington Post
HEADLINE: Fallout From a Fire: Chip Prices Soar; Japanese Plant Was Supplier of Plastic Used to Make Computer Part BYLINE: John Mintz, Washington Post Staff Writer BODY:
Prices on some computer memory chips have almost doubled in recent weeks, and one reason is an explosion at a Japanese plastics factory that makes a compound used in the chips. But some computer industry executives say the prices probably will drop as fast as they rose once alternative sources for the plastic are found. The July 4 fire destroyed the Sumitomo Chemical Co. plant in Nihama, which supplies 60 percent of the epoxy resin used to manufacture DRAM -- dynamic random access memory -- computer chips. Leading U.S. manufacturers say they have adequate supplies of the material to make the computer chips for several months, but are scrambling to determine what to do if there's a shortage later. In effect, some computer industry analysts say, the prices are rising in anticipation of a shortage, not because one exists. Those analysts and others in the industry say they're confused about what role the explosion is playing in the steep price increases in memory chips on the informal "spot" market, which supplies many small computer manufacturers. "Everybody's trying to figure out what to do," said Angela Hatfield, spokeswoman for Motorola Inc., a top U.S. maker of memory chips. "We're still assessing the effects of the explosion to see how our products would be affected." "I've never seen such a situation where it's so hard to get reliable information," said one knowledgeable industry executive who declined to be named. "It's frustrating... . Companies are trying to find alternatives [for the compound], and they're saying, 'What's the next step we take?' " "Presently, National Semiconductor is able to supply our customers' current and historic run rates," said Roberta Silverstein, a spokeswoman for National Semiconductor Corp., which makes memory chips. "We don't have enough information to know what the fire will mean. ... We can only guesstimate what it means." Prices for the computer chips have been rising for months, mostly because of increasing demand and the trend in upgrading the power of personal computers, industry executives said. Now some retailers are telling customers that the fire is why DRAM chips had increased from about $ 30 a megabyte to as much as $ 80 a megabyte. Sumitomo has said it wants to rebuild its plant, but that could take up to a year. Some U.S. chemical companies that were in the epoxy resin market but exited it in recent years have expressed interest in returning, in the wake of the Japanese explosion. But profit margins are tiny in the business, and entrants must undergo a thorough process of ensuring quality controls in their work, since even the most minuscule impurities in a computer chip can ruin it.

9. Now consider the effect of the fire. 1
Now consider the effect of the fire. 1.     Depict the short run effect of the fire on the graphs below. 2.     Provide a brief narrative of events.

10. Use the graph below to show the long run effects of the fire and “the trend in upgrading the power of personal computers.”
In the long run, the price of resin will drop and the number of firms will adjust to the increase in demand.
As new firms enter, the short run supply curve will shift to the right.
Entry will continue until the price returns to the old min ATC.

11. Consider the following diagram
Consider the following diagram. Suppose capital costs $10 and labor costs $ If the firm is producing 750 units of the good efficiently at an average total cost of $500, how much labor are they using? Label the graph accordingly. 2. If the firm could produce 1500 units of the good efficiently with an average variable cost of $700, how many units of labor would the firm be using? Label the graph accordingly. 3. If the firm used 100 units of capital to produce 1500 units of the good efficiently what would ATC be? 4. If the firm moved from point B to D on the graph would the firm be cost minimizing or output maximizing? Explain. 4. Would a firm ever produce at E? Explain.
Answer (1):
TC=750*500=$375,000
75*10+X*$20=375,000
X=(375, )/20=18,712.5 units of labor
Answer (2):
VC=1500*700=$1,050,000
L=$1,050,000/20=52,500 units of labor
Answer (3):
TC=100*$10+$1,050,000=$1,051,00
ATC=$1,051,000/1500=$700.67
Answer (4):
The firm would be cost minimizing. It would be producing the same output at a lower total cost.
Answer (5)
The firm would produce at E if it faced an unexpected increase in demand and wanted to increase output in the short run where the amount of capital is fixed.

12. The Curve
Mandatory one week cooling off period for questions about exam.