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# Answer problem numbers 3, 4, 5, 7, 17, &18 of chapter 7 on pages 159-161,

3. Suppose that in 2010, you became president of a small nonprofit theater company. Your playhouse has
120 seats and a small stage. The actors have national reputations, and demand for tickets is enormous
relative to the number of seats available; every performance is sold out months in advance. You are
elected because you have demonstrated an ability to raise funds successfully. Describe some of the
decisions that you must make in the short run. What might you consider to be your fixed factor? What
alternative decisions might you be able to make in the long run? Explain.
= On the short run, to increase the revenue we are earning, We could add a meet and greet with the
actors or increase the ticket prices to take advantage of the popularity of the show. The Fixed factor of the
playhouse would be the capacity. 120 seats only and a small stage. On the long run, since were always
fully booked. We can raise enough funds for adding more seats and a bigger stage.

## 4. The following table gives total output or total product as a function

of labor units used.

## a. Define diminishing returns.

Diminishing returns appear when additional units of variable inputs are added to fixed inputs.
b. Does the table indicate a situation of diminishing returns?
Yes, the Table indicates a situation of diminishing returns. As we can observe from the table. When there
was only 1 unit of labor. It can produce 5 units of output and though it increases as more units of labor are
added, it can be observed that the total output that we assume would 1:5 was not followed, instead the
total output per labor decreases.
5. Suppose that widgets can be produced using two different
production techniques, A and B. The following table provides
the total input requirements

## a. Assuming that the price of labor (PL) is \$1 and the price of

capital (PK) is \$2, calculate the total cost of production for
each of the five levels of output using the optimal (leastcost)
technology at each level.
b. How many labor hours (units of labor) would be
employed at each level of output? How many machine
hours (units of capital)?
c. Graph total cost of production as a function of output. (Put

## cost on the Y-axis and output, q, on the X-axis.) Again

assume that the optimal technology is used.
d. Repeat a. through c. under the assumption that the price of
labor (PL) rises from \$1 to \$3 while the price of capital (PK)
remains at \$2.
7. The following is a production function.

## a. Draw a graph of marginal product as a function of output.

(Hint: Marginal product is the additional number of units of
output per unit of labor at each level of output.)
b. yes it does exhibit diminishing return for as we can observe in the graph. 100 unit of labor can
produce 1000 Q of output. Whereas at 300 units of labor we shouldve produced 3000 units of output
instead it only produced 2000 units.
17. The following table represents data for Samanthas Smoothies.
Draw a graph showing the total product, marginal product of
labor, and average product of labor. Identify where increasing
returns, diminishing returns and negative returns set in on the
total product curve.

18. Which of the following are short-run decisions and which are
long-run decisions?
a. General Motors decides to add a second shift to its
Arlington, Texas production plant.
b. Gotham Foods International chooses to exit the restaurant
industry to concentrate on its wholesale grocery
c. The Sahara Hotel and Casino in Las Vegas closes two of its
three hotel towers in response to low demand.
d. Tony Andretti, owner of Tony the Taxman, hires five new
CPAs to work at his tax preparation business.

## e. German tool and appliance manufacturer Bosch enters the

electric bicycle industry in 2010.
f. General Electric builds a new offshore wind manufacturing
plant in the United Kingdom.

## Price analysis is an overly complex task for apprentice scholars especially

given its coverage in economics publications. This essay aims to help
analysis. Supply and demand form a foundation for that analysis. On the
supply side of the analysis, this foundation and those skills are valuable for

## understanding the status of a firm in terms of whether it is operating near the

shut-down point, the break-even point, or somewhere in between. Value also
accrues by helping students and readers determine whether a firm is earning
a normal profit or an economic profit. The degree of competition is a key
feature in these analyses, which falls under the notion of a market structure.
There is a variety of ways in which to conduct price analysis whether one
examines supply or demand.
The information presented in this essay provides a frame of reference with
which to simplify price analysis and to distinguish macroeconomic price levels
from microeconomic market prices. Though this essay provides a foundation
to examine resource markets, its main purpose to help undergraduate
students and other readers develop skills in analyzing prices found in the
goods and services market. Specifically, this essay will improve the reader's
ability to answer the following questions: Why do prices change or differ?
What are the key determinants driving price variations? Which prices are of
greatest interest and to whom? How do producer costs interact with the
market prices consumers pay and producers receive? Perhaps the most
important question is: What do market prices tell us in precise terms about a
firm's operating status, its profit level, and its competition?
In order to answer this last question, a need exists to define the term price.
Pearce (1992) informs us in a concise manner what the terms price and price
level mean. An input's or an output's price is the amount of money that is
required to obtain an item whether it is an input or an output. With its focus on
consumer and firm behavior, microeconomics is an area of inquiry that
focuses, in part, on production decisions and price theory. At a much broader
perspective, macroeconomic inquiry concerns itself, in part, with the general
level of prices or a price index, which indicates the extent to which the prices
for items within a larger bundle of goods change over time. The index is an
average of item prices weighted according to the proportion of total
expenditures on each item of the bundle. Price analysis in this essay will
touch upon that broad perspective, but it conveys many more crucial details

## about the narrower perspective, especially with regard to production decisions

and price theory.
Prices generally reflect an agreement between sellers and buyers who
exchange goods and services as they interact in the marketplace. In addition,
most sellers take the price dictated by market forces and very few sellers are
able to set the market price. As many undergraduate students experience
graph phobia, readers of this essay are encouraged to postpone cross
references between the text printed herein and the graphs found in textbooks
by Guell (2007), McConnell & Brue (2008), or other economists. In the pages
at hand, without the aid from and/or the distraction that graphs provide, the
and supply before moving onward to examine how inputs and their costs,
production rules and outputs, producer's and consumer's willingness and
ability, and market forces and structures converge to determine an item's
price.
Applications
Foundations of Price Analysis: Demand
When viewing a two-dimensional graph showing the demand and supply
curves in the market for any given item, viewers would notice that its price
appears on the vertical axis and its quantity is appears on the horizontal axis.
Equilibrium price and quantity occur where quantity demanded equals quantity
supplied or where the downward-sloping demand curve intersects the upward
sloping supply curve. At this juncture, take note that two forms of movement
may occur on the graph: Movement along a curve and a shift in the curve. To
keep these movements straight, price analysts should simply note that a
change in price initiates movement along the curve whereas a change in a
determinant initiates a shift in the curve. An equilibrium point is static at one
instance, but it is also dynamic in nature by virtue of a curve shift that results
in a different intersection of the demand and supply curve. New intersections
and new equilibrium prices and quantities often result from any inward or
outward curve shift.

Determinants of Supply
The demand curve will shift in accordance with a change in a determinant and
so will the supply curve. Keep in mind that five determinants exist each for the
demand curve and for the supply curve and each can prompt a shift in one
curve or both curves. Because it is quite easy to feel overwhelmed and lose
track of a critical sequence when more than one curve shift occurs, the author
of this essay encourages students to contemplate only one change in one
determinant of supply or demand at a time. In other words, each change will
likely produce a shift in the curve under consideration.
Before listing the sets of determinants, price analysis is easier by committing
to memory various aspects of curve shifts. A rightward, outward, or upward
shift in the demand curve is an increase in demand whereas an opposite shift
is a decrease in demand. By extension, an increase (decrease) in demand
means consumers will purchase a larger (smaller) quantity of an item at any
given price. A rightward, downward, or outward shift in the supply curve is as
an increase in supply whereas an opposite shift is a decrease in supply.
Likewise, an increase (decrease) in supply means producers will supply a
larger (smaller) quantity of an item at any given price. In contrast to curve
shifts, any movement along a demand curve or a supply curve is respectively
a change in quantity demanded or quantity supplied to which there is a
corresponding change in price.
The list of five determinants for demand and those for supply is as follows:
Demand Supply Consumer income Prices of alternative outputs Population or
number of buyers Number of sellers Consumer tastes and preferences
Technology Prices of related goods Resource prices Expected prices
Expected prices
Correspondence between prices and quantities is revealed through demand
and supply schedules. Construction of these schedules occurs at two levels of
aggregation. Compilations of a market-level demand schedule and supply

## schedule originate with individual-level schedules. All individuals that buy or

sell an item constitute the market for that item. Individual demand schedules
represent the quantities each consumer are willing and able to purchase at
each price. The summation of quantities from those individual demand
schedules across each price becomes the market demand schedule. In
comparison, market supply schedules represent the sum of quantities that
individual producers are willing and able to sell at each price as long as the
market price makes it feasible for them to do so, which is...