Question

State whether the following statements are true, false or uncertain and briefly explain the reason for your choice. Your grade will largely depend on the quality of your explanations.

a. Suppose that a firm’s short-run total cost function is STC= 0.1q2 + 4q +100. Will the producer surplus at P=$15 be $302.5?

b. Suppose that a firm is price taker. If the price is equal to marginal cost, then the profit is being maximized.

c. If a firm wished to maximize profit, it will always reduce output if wage rates rise.

d. If a competitive firm's price is below its marginal cost, an increase in production will usually decrease profits.

e. A profit maximizing firm will never hire that quantity of a factor of production for which that factor has an increasing marginal productivity because it would not be maximizing profits.

Answer 1

A)STC= 0.1q2 + 4q +100

MC=0.2q+4

15=0.2q+4

Q=11/0.2=55

Produer surplus=1/2*55*(15-4)=0.5*55*11=302.5

Yes

B)The price taker firm or perfect competition firm, Profit Maximizing quantity is where ,P=MC.

So statement is true.

C)firms demand of Labour is downward sloping. Showing higher the wage ,lower the demand of Labour. So Increase in wage , Decrease hired Labour. And thus lower Labour will result in reduction in output.

Right

D) if P<MC, means additional unit gives less revenue than it cost . So producing additional unit will give loss and Decrease Profit.

Right

E) right. Because at increasing productivity or marginal product,

If MRP=W{ Profit Maximizing hiring} and at next unit Marginal is higher ,then hiring additional unit of labour will increase Profit. So MRP= wage is not Optimal hiring when MP is Increasing.