EC 201

Cal Poly Pomona

Dr. Bresnock
Final Exam Review Question Answers

1. A jeans manufacturer hires workers to sew jeans in its factory and derives the
following daily yields of total product, or jeans output (in pairs):

Factory Total Total Total Marginal

Workers TP MP Value Input Profit MVP MC Profit
(day) (pairs) Product Cost

0 0 $ 0 $ 0 $ 0

1 5 5 150 90 60 $150 $ 90 $ 60

2 15 10 450 180 270 300 90 210

3 20 5 600 270 330 150 90 60

4 23 3 690 360 330 90 90 0

5 24 1 720 450 270 30 90 - 60

6 23 -1 690 540 150 - 30 90 - 120

a) Does this production function exhibit increasing, decreasing, constant returns, or

some combination of the three? ↑ from 0 – 2, then ↓ from 2 to 6, and actually
negative for unit 6.

b) Assuming the price of jeans is $30 per pair and each worker is paid $90 per day, if
the jeans manufacturer acts to maximize profit, how many pairs of jeans will be
produced? 23 How many workers will be employed? 4 What will
the jean manufacturer's profit be at this output level? $330 Why?
(State the key condition used in your analysis and show all work in the table above.)

Choose L so that (1) Max. Total Economic Profit = Max (TVP – TC),
or (2) MVP = MC

c) Now assume that each worker's wage drops to $30 per day. What is the new profit
maximizing total output? 24 How many workers are hired at this level? 5
Why?

Same as (b)

d) As a result of the input cost decrease specified in part (c), have profits risen or fallen?

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 risen By how much have profits changed? $240

2. You are given the following information: TFC = $300, and Plabor = $20/hour.

a) Fill in the blanks in the following table.

Labor
(hours) TP = MP TFC TVC TC ATC AVC AFC MC
Q

0 0 $300 $ 0 $300 ------ ------ ------

1 50 50 300 $20 320 $6.40 $ .40 $6.00 $ .40

2 110 60 300 40 340 3.09 .36 2.73 .33

3 150 40 300 60 360 2.40 .40 2.00 .50

4 185 35 300 80 380 2.05 .43 1.62 .57

5 215 30 300 100 400 1.86 .46 1.40 .66

6 235 20 300 120 420 1.78 .51 1.27 1.00

7 240 5 300 140 440 1.83 .58 1.25 4.00

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b) Using the data from the table on the first page, graph the total cost, total
variable cost, and the total fixed cost below.

$ 500

400

300
TC
TFC
200 TVC

100

0
0 50 100 150 200 250

OUTPUT

c) Using the data from the table on the first page, graph the average total
cost, average variable cost, average fixed cost, and marginal cost below.

10

ATC
AVC
AFC
MC
1

0 50 100 150 200 250

OUTPUT

d) The point of diminishing returns occurs when total product, or output, is

110 , the amount or labor hours are 2 , the marginal product
is 60 , and the marginal cost is .33 .

e) This production function shows ↑ing then ↓ing

(increasing, diminishing, constant, combination of all three) returns.

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3. a) Complete the cost table to make it consistent with the given numbers.

b) Plot the total cost functions for the range of output 0 - 10 on one diagram,
and the average and marginal cost functions on another diagram.

Q TC TFC TVC ATC AFC AVC MC

0 20 20 0

1 21 20 1 21 20 1 1

2 24 20 4 12 10 2 3

3 32 20 12 10.7 6.7 4 8

4 48 20 28 12 5 7 16

5 75 20 55 15 4 11 27

6 116 20 96 19.3 3.3 16 41

7 174 20 154 24.85 2.9 22 58

8 260 20 240 32.5 2.5 30 86

9 380 20 360 42.2 2.2 40 120

10 540 20 520 54 2 52 160

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 4.

a)

Q P TR TC Total Econ. Profit or MR MC ATC

Loss
0 15 0 10 -10 15 ---
1 15 15 21 -6 15 11 21
2 15 30 30 0 15 9 15
3 15 45 41 4 15 11 13.6
4 15 60 54 6 15 13 13.5
5 15 75 69 6 15 15 13.8
6 15 90 86 4 15 17 14.3

$ MC

PMax 15  P=AR=MR=D
ATC
13.8 
 AVC


Q
0 QMax 5
Pizzas

Per Unit Profit = 15.00 – 13.80 = 1.20

Total Profit = 1.20 X 5 Pizzas = $6.00

b)

From a)

ATC @ 3 Pizzas = $13.67 – $11.00 (AR) = $-2.67 per unit loss

Total Loss = $-2.67 X 3 = $-8.01 Loss

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 Q MR MC TR TC Total Profit or Loss
0 $11 --- $10 $ -10
1 11 $11 $11 21 -10
2 11 9 22 30 -8
3 11 11 33 41 -8 Loss Min
4 11 13 44 54 -10
5 11 15 55 69 -14
6 11 17 66 86 -20

TC
$

TR

TFC
$10

Q
0 QMin 3
Pizzas

MC
$

ATC
$13.67 
A AVC
 MR=AR=D=P
PMin $11 B

AB = Per Unit Loss
= $-2.67
Total Loss = $-8.00

Q
0 QMin 3
Pizzas

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 MC = Luigi’s Supply
c)

$
ATC

AVC


$10
Min AVC = 1st point on
short-run supply

Q
0 2 Pizzas

d)

Luigi leaves if P < min. AVC or < $10

Other firms enter if P > min. ATC or P > $13.50

e)
MC

ATC = AC

P=AR=MR=D
PBE 

Q
0 QBE

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5. Using the following information, complete the table below.

Q TC MC P MR AR TR Total Profit
0 $10 $10 -10
1 16 6 10 $10 $10 $10 -6
2 20 4 10 10 10 20 0
3 25 5 10 10 10 30 5
4 32 7 10 10 10 40 8
5 42 10 10 10 10 50 8
6 56 14 10 10 10 60 4
7 75 19 10 10 10 70 -5
8 100 25 10 10 10 80 -20
9 132 32 10 10 10 90 -42

MR = MC and MC is Rising

a) Determine the price and output selection for this purely competitive firm. Is this a
short-run or long-run equilibrium? Why?

PMAX = $10 Short-Run  Fixed Costs

QMAX = $5 Diminishing Returns
Total Profit = $8

b) Utilizing the TR and TC approach to graphically illustrate the equilibrium results

for this firm.

TC
TR  P = $10
$

TFC = $10
Q
0 QMAX = 5

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c) Calculate the ATC and AVC for this firm. At what price level will the firm
break-even? shut-down?

Q TC ATC* AVC* TVC TC

0 $10 $10
1 16 $16 $6 $6 16
2 20 10 5 10 20
3 25 8.33 5 15 25
4 32 8 5.5 22 32
5 42 8.4 6.4 32 42
6 56 9.33 7.67 46 56
7 75 10.7 9.29 65 75
8 100 12.5 11.25 90 100
9 132 14.67 13.56 122 132

MR = MC, MC Rising

PBE = AR = min ATC = $8

PSHUT-DOWN = AR = min AVC = $5

d) Utilizing the MR and MC approach graphically illustrate the results for

equilibrium for this firm determined in part (a).

Total Profit = $8
$ MC

ATC
PMAX = $10.00 D=AR=P=MR
$8.40 AVC
$8.00
$5.00 Per Unit Profit = $1.60

0 5 Q
QMAX

e) In your graph for part (d) show the price level at which the firm will break even.
Then show the price level at which the firm will shut down.

* $8.00 = break-even price level

* $5.00 = shut-down price level

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6.

a)

Q P TR MR MC TC Total Profit or Loss

0 $10 --- $1 $ -1
1 8 $8 $8 $2 3 +5
2 6 12 4 4 7 +5
3 4 12 0 6 13 -1
4 2 8 -4 8 21 - 13
5 0 0 -8 10 31 - 31

For Part a)
b) Rest of table above is needed for part b)

Q=2
P = $6
Total Profit = $5

TC

TR

TFC = $1

0 Q
QMax 2
Bottles

Q TC TFC TVC ATC AVC

0 $1 $1 $0 --- ---
1 3 1 2 3 2
2 7 1 6 3.5 3
3 13 1 12 4.3 4
4 21 1 20 5.25 5
5 31 1 30 6.2 6

See also table in part (A)

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 MC
ATC

AVC
$
A
PMax $6 

B
$3.50 
P=AR=D

MR

0 Q
QMax
2
Bottles
(C)  TFC does not  output choice. Still MR = MC @ 2 units. But the firm now
has TC = TR = $12 ( TFC = $5) and breaks even. If TFC  BY $10, then firm
loss minimizes at MR = MC @ 2 units (see table below)

Q New Total Profit or Loss

0 - 11
1 -5
2 -5
3 - 11
4 - 23
5 - 41

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7. Pure Monopoly

Using the following information, complete the table below.

Q TC MC P MR AR TR Total Profit

0 $10 $10 $-10

1 16 6 9 $9 $9 $9 -7
2 20 4 8 7 8 16 -4
3 25 5 7 5 7 21 -4
4 32 7 6 3 6 24 -8
5 42 10 5 1 5 25 -17
6 56 14 4 -1 4 24 -32
7 75 19 3 -3 3 21 -54
8 100 25 2 -5 2 16 -84
9 132 32 1 -7 1 9 -123

a) Determine the price and output selection for this imperfectly competitive firm. Is
this a short-run or long-run equilibrium? Why?

PMIN = $7 ATC = $8.30

QMIN = $3 - AR = $7.00
Total Loss = $4 Per Unit Loss = $1.30
Total Loss = $1.30 x 3 = $3.90  $4.00

b) Utilize the TR and TC approach to graphically illustrate the equilibrium results

for this firm.

TC
$

TR
TFC
Total Loss = $4

Q
0 3
QMIN

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c) Calculate the ATC and AVC for this firm. At equilibrium does this firm earn a
profit, loss, or break-even? If profit or loss what are the unit and total profits or
losses?

Q TC TFC TVC ATC AVC

0 $10 $10
1 16 10 $6 $16 $6
2 20 10 10 10 5
3 25 10 15 8.3 5
4 32 10 22 8 5.5
5 42 10 32 8.4 6.4
6 56 10 46 9.3 7.67
7 75 10 65 10.7 9.29
8 100 10 90 12.5 11.25
9 132 10 122 14.7 13.56

Per Unit Loss = $1.30 Total Economic Loss = $4

d) In equilibrium had the firm covered its variable and fixed costs? Will this firm
shut-down in the short-run? Why or Why not?

Covered Variable and a portion of fixed.

It will not shut-down since losses decrease as output increases
and loss is less than fixed costs associated with zero production.

e) Utilize the MR and MC approach to graphically illustrate the equilibrium results

for this firm determined in part (a).

Total Loss = $4 MC

$ ATC
AVC
$8.30
PMIN = $7.00 Per Unit Loss = $1.30

P=AR=D

MR

0 3 Q
QMIN

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