Calculating Reservation Prices



Calculating Reservation Prices

The table below depicts the production function for a firm that produces fast food hamburgers (Q). The firm uses a fixed input of 2000 units of capital (K=square feet in a building) and a variable input of labor and ingredients (L).

| | | |Reservation price (w=$20)|Reservation price (w=$50)|

|L |Q |MP | | |

|0 |0 |x |x |x |

|1 |40 | | | |

|2 |75 | | | |

|3 |105 | | | |

|4 |130 | | | |

|5 |150 | | | |

|6 |165 | | | |

|7 |175 | | | |

|8 |180 | | | |

|9 |183 | | | |

|10 |185 | | | |

a. If the wage rate is $20 per unit of L, construct the reservation price schedule.

b. If the wage rate is $50 per unit of L, construct the reservation price schedule.

If the firm has to pay $0.50 per square foot of capital and has to pay a wage rate equal to $20 per unit of labor, calculate TFC, TVC, TC, AFC, AVC, ATC, and MC in the table below.

L |Q |TFC |TVC |TC |AFC |AVC |ATC |MC | |0 |0 | | | |x |x |x |x | |1 |40 | | | | | | | | |2 |75 | | | | | | | | |3 |105 | | | | | | | | |4 |130 | | | | | | | | |5 |150 | | | | | | | | |6 |165 | | | | | | | | |7 |175 | | | | | | | | |8 |180 | | | | | | | | |9 |183 | | | | | | | | |10 |185 | | | | | | | | |

What level of output minimizes ATC?

If the firm sells its output in a competitive market at a P=$7, what output should it produce to maximize profits? What will profits equal at that output?

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