Question

6)

The Smiling Cow Dairy can sell all the milk it wants for $4 per gallon and rent all the milking machines it wants at a price of $100 per machine per day.

Suppose that the relationship between machines and output is as follows:

Number of Machines	Gallons of Milk
0	0
1	50
2	85
3	115
4	142
5	150
6	155

In order to maximize profit, how many machines should the firm rent? ......

7) A small nation of 10 hipsters produces and consumes skinny jeans and mustache wax in the following amounts:

Year	Jeans Output	Jeans Price	Wax Output	Wax Price
2016	10 units	$40	30	$10
2017	12 units	$60	50	$12

Using a basket of 1 (pair of) jeans and 2 cans of wax, compute the CPI for this economy. Do not include any unit labels.

CPI 2016 ? ......................

CPI 2017 ? .....................

Inflation rate (as a percentage value with base year 2016) ? .....................

Answer 1

6. 4 machines
Machines are rented upto the point where VMPK just exceeds or equal the price of machine (100)
At K = 4, MPK = 142-115 = 27
So, VMPK = Price*MPK = 4*27 = 108 > 100
At K = 5, MPK = 150-142 = 8
So, VMPK = Price*MPK = 4*8 = 32 < 100
So, 4 machines will be rented.

7.
Quantity of jeans = 1 pair and quantity of wax = 2 cans
Cost of basket in 2016 = Sum of (Price in 2016*respective quantities) = 1*(40) + 2*(10) = 40 + 20 = $60
Cost of basket in 2017 = Sum of (Price in 2017*respective quantities) = 1*(60) + 2*(12) = 60 + 24 = $84
CPI 2016 = (Cost of basket in 2016/Cost of basket in base year)*100 = (60/60)*100 = 100
(As 2016 is the base year)
CPI 2017 = (Cost of basket in 2017/Cost of basket in base year)*100 = (84/60)*100 = 140
Inflation rate = [(CPI2017-CPI2016)/CPI2016]*100 = [(140-100)/100]*100 = 40%