Chapter 5

Problems: 1,4,6,13,17,19

1. A firm can manufacture a product according to the production function Q =F (K, L) = K^(3/4)
L^ (1/4)
a. Calculate the average product of labor, APL, when the level of capital is fixed at 81 units and
the firm uses 16 units of labor. How does the average product of labor change when the firm uses
256 units of labor?
b. Find an expression for the marginal product of labor, MPL, when the amount of capital is
fixed at 81 units. Then, illustrate that the marginal product of labor depends on the amount of
labor hired by calculating the marginal product of labor for 16 and 81 units of labor.
c. Suppose capital is fixed at 81 units. If the firm can sell its output at a price of $200 per unit
and can hire labor at $50 per unit, how many units of labor should the firm hire in order to
maximize profits?

4. An economist estimated that the cost function of a single-product firm is

C(Q)=100+20Q+15Q2 +10Q3
Based on this information, determine:
a. The fixed cost of producing 10 units of output.
b. The variable cost of producing 10 units of output.
c. The total cost of producing 10 units of output.
d. The average fixed cost of producing 10 units of output.
e. The average variable cost of producing 10 units of output.
f. The average total cost of producing 10 units of output. g. The marginal cost when Q =10.

6. A firms fixed costs for 0 units of output and its average total cost of producing different
output levels are summarized in the table below. Complete the table to find the fixed cost,
variable cost, total cost, average fixed cost, aver- age variable cost, and marginal cost at all
relevant levels of output.

13. You are a manager for Herman Miller, a major manufacturer of office furniture. You recently
hired an economist to work with engineering and operations experts to estimate the production
function for a particular line of office chairs. The report from these experts indicates that the
relevant production function is
Q = 2(K)^(1/2)(L)^(1/2)
where K represents capital equipment and L is labor. Your company has already spent a total of
$8,000 on the 9 units of capital equipment it owns. Due to cur- rent economic conditions, the
company does not have the flexibility needed to acquire additional equipment. If workers at the
firm are paid a competitive wage of $120 per day and chairs can be sold for $400 each, what is
your profit- maximizing level of output and labor usage? What is your maximum profit?

17. A local restaurateur who had been running a profitable business for many years recently
purchased a three-way liquor license. This license gives the owner the legal right to sell beer,
wine, and spirits in her restaurant. The cost of obtaining the three-way license was about
$90,000, since only 300 such licenses are issued by the state. While the license is transferable,
only $75,000 is refundable if the owner chooses not to use the license. After selling alcoholic
beverages for about one year, the restaurateur came to the realization that she was losing dinner
customers and that her profitable restaurant was turning into a noisy, unprofitable bar.
Subsequently, she spent about $8,000 placing advertisements in various newspapers and
restaurant magazines across the state offering to sell the license for $80,000. After a long wait,
she finally received one offer to purchase her license for $77,000. What is your opinion of the
restaurateurs decisions? Would you recommend that she accept the $77,000 offer?

19. The A-1 Corporation supplies airplane manufacturers with preformed sheet metal panels that
are used on the exterior of aircraft. Manufacturing these panels requires only five sheet metal
forming machines, which cost $500 each, and workers. These workers can be hired on an asneeded basis in the labor market at $9,000 each. Given the simplicity of the manufacturing
process, the preformed sheet metal panel market is highly competitive. Therefore, the market
price for one of A-1s panels is $80. Based on the production data in the accompanying table,
how many workers should A-1 hire to maximize its profits?
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