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In 1996 dairy farmers, hurt by a decade of low milk prices, began reducing

their herds. Subsequently Kenneth Hein, a Wisconsin farmer, said he was getting

$16 per 100 pounds of milk, rather than $12, which he had gotten earlier.16

a. Why did the price increase?

b. Dairy cattle are often fed corn. When Hein got $16 per 100 pounds of

milk, he paid $5 a bushel for corn; but when he got $12 per 100 pounds

of milk, he paid $2.50 a bushel for corn. Does this mean that Hein made

less money when the price of milk was $16 than when it was $12?

 

 
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The Hassman Company produces two joint products, X and Y. The isocost

curve corresponding to a total cost of $500,000 is QY = 1,000 – 10QX – 5Q 2

X where QY is the quantity of product Y produced by the firm and QX is the

quantity of product X produced. The price of product X is 50 times that of

product Y. a. If the optimal output combination lies on this isocost curve, what is the

optimal output of product X? b. What is the optimal output of product Y?

c. Can you be sure that the optimal output combination lies on this isocost

curve? Why or why not?

 

 
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The Morrison Company produces tennis rackets, the marginal cost of a racket

being $20. Because there are many substitutes for the firm’s rackets, the price

elasticity of demand for its rackets equals about -2. In the relevant range of

output, average variable cost is very close to marginal cost.

a. The president of the Morrison Company feels that cost-plus pricing is

appropriate for his fi rm. He marks up average variable cost by 100% to

set price. Comment on this procedure.

b. Because of heightened competition, the price elasticity of demand for the

firm’s rackets increases to -3. The president continues to use the same

cost-plus pricing formula. Comment on its adequacy.

 

 
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The Backus Corporation makes two products, X and Y. For every unit of good

X that the firm produces, it produces two units of good Y. Backus’s total cost

function is TC = 500 + 3Q + 9Q2

where Q is the number of units of output (where each unit contains one unit

of good X and two units of good Y) and TC is total cost (in dollars). The

demand curves for the firm’s two products are PX = 400 – QX

PY = 300 – 3QY where PX and QX are the price and output of product X and PY and QY are the

price and output of product Y. a. How much of each product should the Backus Corporation produce and sell per period? b. What price should it charge for each product?

 

 
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