ECON 3305 -Managerial Economics Homework 3

ECON 3305 Managerial EconomicsHomework 3The homework covers Ch 8~10. It has to be your individual work. Copying answer fromothers will violate ACADEMIC HONESTY policy to cause a failing grade. For eachquestion, please show the necessary derivation (if applicable) and highlight the answer.Limit your answers within 5 pages. No cover sheet is required.Q1: CH 8 (10%)At a management luncheon, two managers were overheard arguing about the followingstatement: “A manager should never hire another worker if the new person causesdiminishing returns.” Is this statement correct? If so, why? If not, explain why not. Q2: CH 8 (20%)Suppose that a firm is currently employing 20 workers, the only variable input, at a wagerate of $250. The average physical product of labor is 25, the last worker added 10 unitsto total output, and total fixed cost is $5,000a. What is marginal cost?b. What is average variable cost?c. What is the average total cost?d. At the current output rate, is average variable cost increasing, constant, or decreasing?Is average total cost increasing, constant, or decreasing? (Hint: Check the graph ofshort-run cost curves) Q3: CH 9 (10%)The Largo Publishing House uses 400 printers and 200 printing presses to produce books.A printer’s wage rate is $20, and the price of a printing press is $5,000. The last printeradded 8 books to total output, while the last press added 2,500 books to total output. Isthe publishing house making the optimal input choice? Why or why not? If not, howshould the manager of Largo Publishing House adjust input usage? Q4: CH 9 (10%)Gamma Corporation, one of the firms that retains you as a financial analyst, isconsidering buying out Beta Corporation, a small manufacturing firm that is now barelyoperating at a profit. You recommend the buyout because you believe that newmanagement could substantially reduce production costs, and thereby increase profit to aquite attractive level. You collect the following product information in order to convincethe CEO at Gamma Corporation that Beta is indeed operating inefficiently:MPL = 25PL =$20MPK = 15PK =$15Explain how these data provide evidence of inefficiency. How could the new manager ofBeta Corporation improve efficiency? Q5: CH 9 (10%)Ross Perot added his memorable “insight” to the debate over the North American FreeTrade Agreement (NAFTA) when he warned that passage of NAFTA would create a“giant sucking sound” as U. S. employers shipped jobs to Mexico, where wages are lowerthan wages in the United States. As it turned out, many U. S. firms chose not to producein Mexico despite the much lower wages there. Explain why it may not be economicallyefficient to move production to foreign countries, even ones with substantially lowerwages. Q6: CH 10 (20%)You are planning to estimate a short- run production function for your firm, and you havecollected the following data on labor usage (L) and output (Q):Labor usage (L)3791117172024262830 Output (Q)12358101518222123 a. Please key in the data into MS Excel for regression analysis. Estimate your firm’sshort-run production function. Do the parameter estimates have the appropriatealgebraic signs? Are they statistically significant at the 5 percent level? (Hint: Runthe production function as Q = AL3 +BL2)b. At what point do you estimate marginal product (MP) begins to fall?c. Calculate estimates of average products (AP) and marginal products (MP) when thefirm employs 20 workers.d. When the firm employs 20 workers, is short-run marginal cost (MC) rising or falling?How can you tell? Q7: CH 10 (20%)The chief economist for Argus Corporation, a large appliance manufacturer, estimatedthe firm’s short- run cost function for vacuum cleaners using an average variable costfunction of the formAVC = a + bQ + cQ2 Dr. C. Chen where AVC dollars per vacuum cleaner and Q number of vacuum cleaners produced eachmonth. Total fixed cost each month is $180,000. The following results were obtained:DEPENDENT VARIABLE: AVCOBSERVATIONS: 19 VARIABLEINTERCEPTQQ2 PARAMETERESTIMATE191.930.03050.0000024 R-SQUARE0.7360 F-RATIO39.428 P-VALUE ON F0.0001 STANDARDERROR54.650.007890.00000098 T-RATIO3.51223.8662.449 P-VALUE0.00290.00140.0262 a. Are the parameter estimates statistically significant at the 1 percent level ofsignificance?b. Do the results indicate that the average variable cost curve is U-shaped? How do youknow?c. If Argus Corporation produces 6,000 vacuum cleaners per month, what is theestimated marginal costs and total costs?d. At what level of output will average variable cost be at a minimum? What is minimumaverage variable cost?