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Suppose that in her first hour of work, Lynn can hand-knit four pairs of mittens. During her second consecutive hour, Lynn can hand-knit three additional pairs of mittens, and during her third hour of work, as a consequence of fatigue, she can hand-knit only one additional pair. Suppose that she works for up to three hours and makes a wage of $15 per hour.

a. Create a table relating the number of hours worked to the total number of pairs of mittens produced, and graph the total product curve for the production of pairs of mittens. Label clearly.

 

b. Looking at labor costs only (ignoring, for the purposes of this exercise, the cost of the yarn that she uses and any fixed costs), make a table relating costs to the number of pairs of mittens produced. Graph the total (labor) cost curve for the production of mittens. Label clearly.

 

c. How would you describe in words the pattern of marginal returns? The pattern of marginal costs?

d. What is the marginal product, in pairs of mittens per hour, of her second hour of work? Of her third hour of work? e. What is the marginal cost, in dollars per pairs of mittens, as she goes from

an output of four pairs of mittens to an output of seven pairs of mittens? What is the marginal cost of the eighth pair of mitens?

 

 
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The Top Notch Grill’s marginal costs of producing take-out meals are described below.

The Top Notch Grill’s marginal costs of producing take-out meals are described below. a. Assuming...-1

The Top Notch Grill’s marginal costs of producing take-out meals are described below. a. Assuming...-2

a. Assuming that the Grill has fixed costs of $7, what is its total cost at each level of production? (Add a column to the table.)

b. Assume that meals sell for $10 each and the Grill is a perfectly competitive firm. What are the Grill’s total revenue (price × quantity), marginal revenue, and total profit (total revenue – total cost) at each level of production? (Add three more columns to the table.)

c. How many meals should the Grill produce, to maximize profits? Explain in a sentence or two how you arrived at your answer.

 
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Suppose a firm that manufactures bicycles has the following cost structure:

Suppose a firm that manufactures bicycles has the following cost structure: a. How mu? does this...

a. How mu does this firm have in fixed costs?

b. Using graph paper or a computer program, graph the total cost curve for this firm. Suppose that bicycles sell for $200 each, and the firm is a price taker. Create a table showing the marginal cost, total cost, marginal revenue, total revenue (price × quantity), and total profit (total revenue – total cost) at each level of production.

c. Add a total revenue curve to the graph that you created in (b). Indicate with arrows the approximate quantity at which the vertical distance between the two curves is the greatest.

d. Would the firm make a profit by producing and selling only one bicycle? Would one bicycle be the best output level for the firm? What is the output level that maximizes profits?

 
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Suppose that a perfectly competitive firm manufactures gizmos with the following cost structure (including all opportunity costs):

Suppose that a perfectly competitive firm manufactures gizmos with the following cost structure...-1

Suppose that a perfectly competitive firm manufactures gizmos with the following cost structure...-2

a. Calculate the marginal cost schedule for this firm in a table, and then graph the marginal cost curve.

b. If the price of gizmos on the market is $175 each, how many gizmos should the firm produce to maximize profits? What is the level of the firm’s revenues at its chosen output level? How much does it make in profit?

 c. Suppose that more firms start producing gizmos, and the market price drops to $125. How many gizmos should this firm now produce to maximize profits? (Note: In the case of discrete quantities such as these, interpret the P = MC rule as “produce as long as price is at least as great as marginal cost.”) What is this firm’s new revenue level? How much does it make in profits?

d. When the price is $125, will more firms want to enter the market? Will existing firms want to exit?

 
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