1997 Micro Free Response
1.
Workers Output 3 60 4 80 5 105 6 125 7 140 8 150 The table above describes the production function for John Jones's T-shirt firm. Jones can hire as many workers as he wants for $75 per day and can sell as many T-shirts as he wants for $5 each.
- Given the production information above, do each of the following.
- Draw a graph showing this firm's demand and supply curves for workers.
- Explain how Jones will determine the number of workers to hire.
- Indicate how many workers Jones will hire.
- Assume the wage rate at which Jones can hire all the workers he wants increases to $120 per day, and the selling price of T-shirts increases to $6. Do each of the following.
- Explain how the demand for workers will change.
- Indicate how many workers Jones will hire.
- Indicate the quantity of T-shirts Jones will produce.
- In which type of market structure does Jones sell his T-shirts? Explain how you know.
Answer to #1
2. An electric utility company is operating without price regulation under conditions of a natural monopoly and is currently earning economic profits.
- Draw a graph and indicate each of the following for the firm.
- The equilibrium price and output
- Economic profits
- The government now wants to regulate the price. Indicate what price the government will set to achieve each of the following.
- Normal profits only (zero economic profits)
- Efficient use of available resources
- If the regulators set the price as indicated in part b(ii), will the firm continue to operate in the long run? Why or why not?
Answer to #2
3. Marginal analysis is essential to microeconomic decision making. Discuss how marginal analysis is used in each of the following cases.
- To derive the supply curve for a perfectly competitive firm
- To identify the least-cost combination of capital and labor used to produce a given level of output
- To regulate an industry that produces a product that generates negative externalities
Answer to #3