CHAPTER 10

14. For a given firm, MRPL = $50 and MRPK = $100 while PL = $10 and PK = $20.
A. Is the firm maximizing profits? Why or why not?
The problem above consists of two variable factors of production - labor and capital. In
order to determine whether the firm is maximizing profits, we needed to test it using the
profit-maximizing condition, where the firm operates at optimal level or employs the least
costs on combination of inputs.
In order to check whether the conditions are met, we needed to compute first for the MP L
(marginal product of labor) and MPK (marginal product of capital) using the equation on
MRP (marginal revenue product):
MRPL = MPL x Px

MRPK = MPK x Px

50 = MPL x Px

100 = MPK x Px

MPL = 50 / Px

MPK = 100 / Px

Derive MPL / PL:

Derive MPK / PK:

MPL / PL

MPK / PK

= (50 / Px) / 10

= (100 / Px / 20

= (50 / Px) x 1/10

= (100 / Px) x 1/20

= 50 / 10 Px

= 100 / 20 Px

= 5 / Px

= 5 / Px

Check if profit maximizing condition is true:

MPL / PL = MPK / PK
5 / Px = 5 / Px
Alternately, we can check the equation by giving an assumption on the value of P x. For
example, we assume Px = $2
MPK = MRPK / Px
MPK = 100 / 2 = 50
MPL = MRPL / Px
MPL = 50 / 2 = 25

Substitute the data in the profit-maximizing condition:

MPL / PL = MPK / PK
25 / 10 = 50 / 20
2.5 = 2.5
The firm is maximizing its profits because profit maximizing condition MPL/PL = MPK/PK
is held true.
B. Identify a specific action that would increase this firms profits.
Profits are already being maximized or the firm is already operating on optimal level
so there is no need to change the input variable factors. It will only require specific action
if the profit-maximizing condition is not met.

CHAPTER 11
11. In March 2008, the General Motors building, a skyscraper in Manhattan, was up for bid.
At the time, the skyscraper was expected to fetch more than $3 billion, a record for a single
building. If you were a real estate investment company considering bidding on this building,
what would you want to know first? What specific factors would you need to form
expectations about? What information would you need to form those expectations?
Data Needed to Be Known First
1.
2.

Investments Shelf-Life
Consideration on appreciation of the land
Calculation of depreciation of building
Expected flow of revenues the skyscraper can yield
-

How sure will it be that the building is occupied by tenants?

Or is it possible that the building will lose tenants?
How many big and small companies will occupy the building?
Will they renew their leasing contracts?

3. Cost of the project

- Forecast on all costs including capital expenditures, taxes, maintenance fees, and repair
4.
5.
6.
7.

costs
Return on Investment
Based on capitalization structure (equity or borrowings)
Risk of the project
Market Interest Rate
External economic factors like current economy and consumer preferences
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Specific Factors to Form Expectations

1.
2.
3.
4.

Expected/projected rate of return

Length of time to yield revenues after being built
Cash flow
If Expected Rate of Return is higher than market interest rate, then proceed in investing
Information Needed to Form Expectations

1. Historical financial and physical data

-

Includes information on the owner of the property to check whether the claim is

legitimate or if there is an existing mortgage

reason for sale (RFS)
dimension of the property
if it is at par or more expensive compared to the market price of other properties
within the area

2.
3.
4.
5.
6.

Financial Statements
Basis for Expected Rate of Return
Market Interest Rate over the past years
Operational Costs
Market Forecasts
CHAPTER 12
5. Country A has soil that is suited to corn production and yields 135 bushels per acre.
Country B has soil that is not suited for corn and yields only 45 bushels per acre. Country A
has soil that is not suited for soybean production and yields 15 bushels per acre. Country B
has soil that is suited for soybeans and yields 35 bushels per acre.In 2004,there was no
trade between A and B because of high taxes and both countries together produced huge
quantities of corn and soybeans.In 2005,taxes were eliminated because of a new trade
agreement. What is likely to happen? Can you justify the trade agreement on the basis of
Pareto efficiency? Why or why not?

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Demand for Corn for Country A would increase considering Country Bs land is not
suitable for corn production, hence, demand curve for Corn for Country A would shift to the
right creating a new equilibrium with the new higher price and production quantity. Country
Bs Corn demand curve will likely fall and shift to the left due to Country As penetration of

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Country Bs Corn market, creating a new equilibrium with lower corn price and quantity
production.

However, demand for Soybean for Country A would decline because Country B,
which produces soybeans more efficiently, would penetrate the soybean market of Country
A. Country As soybean demand curve would shift to the left creating a new equilibrium with
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fewer quantity production as well as low price. On the other hand, Country Bs soybean
demand curve would shift to the right creating a new equilibrium with higher quantity and
price.
The trade agreement can be justified based on the Pareto efficiency because
although both countries A and B would benefit from the trade by means of maximizing each
of their lands production capacity, the demand for another product of each country would
also decline due to market penetration of each others market. The trade agreement would
still rather produce a bigger gain than loss.
CHAPTER 13
3. Assume that the potato chip industry in the Northwest in 2009 was competitively
structured and in long-run competitive equilibrium; firms were earning a normal rate of
return. In 2010, two smart lawyers quietly bought up all the firms and began operations as a
monopoly called Wonks. To operate efficiently, Wonks hired a management consulting firm,
which estimated long-run costs and demand. These results are presented in the following
figure.

A. Indicate 2009 output and price on the diagram.

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B. By assuming that the monopolist is a profit-maximizer, indicate on the graph total revenue,
total cost, and total profit after the consolidation.

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C. Compare the perfectly competitive outcome with the monopoly outcome.

D. In 2010, an old buddy from law school files a complaint with the Antitrust Division of the
Justice Department claiming that Wonks has monopolized the potato chip industry. Justice
concurs and prepares a civil suit. Suppose you work in the White House and the president
asks you to prepare a brief memo (two to three paragraphs) outlining the issues. In your
response, be sure to include:
a. The economic justification for action.
b. A proposal to achieve an efficient market outcome.
(Please see answer on 13D on next page)

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The White House

Washington D.C.
CONFIDENTIAL
OCTOBER 3, 2016
MEMORANDUM CIRCULAR NO. 3
FROM
SUBJECT

: THE OFFICE OF THE PRESIDENTIAL COMMUNICATIONS GROUP

: DRAFT MEMORANDUM ON THE POTATO CHIP INDUSTRY
MONOPOLY

The recent complaint filed with the Antitrust Division of the Justice Department against
Wonks regarding the alleged potato chip industry monopoly was found to have merits
prompting the Justice Department to prepare the civil suit. Upon review however, the civil
suit is to be reconsidered given the following reasons:
1. Under the monopoly, the price is higher and output is lower than it was under perfect
competition. Also, pure monopoly means that products produced have no close substitutes.
This is not the case for the potato chips industry since if potato chips prices would go high,
consumers can opt to buy other chips in the market (e.g. cassava chips, banana chips, apple
chips, etc.)
2. Second, a pure monopoly happens when there is significant barriers of entry from
other suppliers. In this case, potato chips manufacturing is really not that difficult to enter if
there is substantial demand.
In line with this, the following are the necessary actions for the Antitrust Division of the
Justice Department:

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1. Do not pursue the civil suit given that the term monopoly is not substantiated. It would be a
pure monopoly only if the product being produced doesnt have many substitutes and if entry
to the market is difficult.
2. Provide incentives/tax relief for companies to enter the industry for the first few year/s of
operations, to encourage new entrants and provide enough competition to spur equilibrium
in prices.
For your guidance.

Dina Natuto
Secretary, Presidential Communications Group

Reference:
Case, Karl E., Fair, Ray C.,& Oster, Sharon M. (2012). Principle of Economics Tenth Edition.

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