Question

Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $16 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats per day it produces depends on the number of employee-hours per day, as shown in the table below.

a. The wage is $18 per hour and Paducah’s daily fixed cost for the lathe and building is $60.

Instructions: Complete the table below. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Express marginal cost values rounded to two decimal places. Q (bats per day) Number of employee-hours per day Total revenue ($ per day) Total labor cost ($ per day) Total cost ($ per day) Profit ($ per day) Marginal cost per bat 0 0 5 1 10 2 15 4 20 7 25 11 30 16 35 22 What is the profit-maximizing quantity of bats (note the values for MR and MC)? bats. b. What would Paducah's profit-maximizing level of output be if the government imposed a tax of $10 per day on the company? (Hint: Think of this tax as equivalent to a $10 increase in fixed cost.): bats

c. What would Paducah's profit-maximizing level of output be if the government imposed a tax of $2 per bat instead of the $10 tax of part b)? (Hint: Think of this tax as a $2 per bat increase in the firm's marginal cost.): bats

d. Why do the taxes in parts b and c have such different effects? A tax of $10 per day doesn't affect the firm's profit, while a tax of $2 per bat does. A tax of $10 per day affects marginal cost, while a tax of $2 per bat does not. A tax of $10 per day does not affect marginal cost, while a tax of $2 per bat does. A tax of $10 per day affects the firm's profit, while a tax of $2 per bat does not.

Answer 1

Ans)

a.

20

Q	Workers	TR=PQ	MR=Change in TR	TFC	TLC=14*Workers	TC=TFC+TLC	Profit=TR-TC	MC=Change in TC
0	0	0		60	0	60	-60
5	1	50	10	60	14	74	-24	2.8
10	2	100	10	60	28	88	12	2.8
15	4	150	10	60	56	116	34	5.6
20	7	200	10	60	98	158	42	8.4
25	11	250	10	60	154	214	36	11.2
30	16	300	10	60	224	284	16	14
35	22	350	10	60	308	368	-18	16.8

b

It would still be 20

Q	Workers	TR=PQ	MR=Change in TR	TFC	TLC=14*Workers	TC=TFC+TLC	Profit=TR-TC	MC=Change in TC
0	0	0		30	0	30	-30
5	1	50	10	30	14	44	6	2.8
10	2	100	10	30	28	58	42	2.8
15	4	150	10	30	56	86	64	5.6
20	7	200	10	30	98	128	72	8.4
25	11	250	10	30	154	184	66	11.2
30	16	300	10	30	224	254	46	14
35	22	350	10	30	308	338	12	16.8