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A firm in a perfectly competitive market has signed a two year lease on a building for $1000 per month. The firm’s only other expense to production is labor.

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ECO 304K INTRO MICRO FALL 2017 Hickenbottom HOMEWORK #3 (Due October 18th at 11am) 1. A firm in a perfectly competitive market has signed a two year lease on a building for $1000 per month. The firm’s only other expense to production is labor. Labor generates output per month based on the table below: Labor (L) Output (Q) 0 0 1 2 2 6 3 11 4 15 5 18 6 20 7 21 8 20 a) Calculate the Marginal Product of each unit of labor. Explain why at L = 5, diminishing returns has already set in. (1 point) b) If labor costs $50 per month, calculate the Marginal Cost at Q = 15 and Q = 18. Explain why these numbers are consistent with your answer to (a) (2 points) 2. The table above has some cost data for a perfectly competitive firm. Assume that only whole quantities of the good can be produced. q FC VC TC MC AVC ATC 0 N/A N/A N/A 1 17 2 13 3 74 4 240 5 25 17 6 120 7 50 8 30.625 a) Fill in the missing items in the following table. I would suggest completing the table, cut it out, and paste it (either electronically or physically) onto the sheet you turn in. You can round decimal answers to 3 places or leave the numbers as fractions. (1 point) b) Find the short run profit maximizing level of output and profit if the price of output is 30. (1 point) c) Find the short run profit maximizing level of output and profit if the price of output is 12.5. (1 point) d) If there are 80 firms in the short run, and the market demand is P = -2Qd + 1000, explain why P = 60 is not the SRCE price. (1 point) e) Find the SRCE price. (1 point) 3. A firm in a perfectly competitive market will produce no output in the short run if the price is below $20 but will produce if the price is above $20. The smallest quantity they will produce in the short run is 6. Firms will earn 0 economic profit if the price is $447.5 and its profit maximizing quantity is 21. The firm’s fixed cost is $6615. Assume the good can be produced in continuous quantities. Draw a picture of the MC, ATC, and AVC for this firm specifically labeling the values for each of these costs at q = 21 and q = 6. Round any decimal answers to 1 place. The diagram does not need to be to scale but needs the curves to exhibit the correct qualities. (2 points)

 
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