Sample Exam 3 Answers

11.

12.   

13.

14.    Cost function
a)  $150,000
b)  $26
c)  $26
d)  C = 170 + 17Q + 25I.

15.    Pizza
a)    If w = 7, then MC = 10.  This means that P will equal $10 also. Plugging P = 10 into the demand equation gives Q = 10,000.  Since there are 100 firms in the industry, each individual firm will produce q = 100.  Since P = AC, each firm is earning normal profits and there is no incentive for firms to enter or exit the industry.
b)   If w = 8.40, then MC = 12 = P.    At the higher price, market output falls to Q = 7000 and the optimal output for the 100 firms is 70 pizzas per firm.  Since this is also a long-run equilibrium, there is no incentive for firms to enter or exit.

16.    Acme Company.
a)  Using MP_L/MP_K = w/r, you can solve for K/L = .267  or K = .267L.  Plug K into the cost function and solve for L: C = 166,500 = (10)L + (25)(.267L).  This gives us L = 9990.  Given the optimal K/L ratio, we know that K = 2664.
b)  Q = 147,195