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Tutorial Set 6

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10 views

Tutorial Set 6

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ebojunior7
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIVERSITY OF CAPE COAST

COLLEGE OF HUMANITIES AND LEGAL STUDIES


SCHOOL OF BUSINESS
DEPARTMENT OF FINANCE
2024/2025 ACADEMIC YEAR – FIRST SEMESTER
Course Code and Title SBU 305 – Managerial Economics
Tutorial Questions Set 6
Area of Coverage Production and Cost

1. Consider the following short-run production function (where L is the units of labour and Q is
the output): Q = 10L – 0.5L2
Suppose that the product can be sold for GHS 10 per unit. Also assume that the firm can obtain
an addition unit of labour at GHS 20.
i. Given that the firm’s objective is to maximise profit, determine the optimal units of labour.
ii. Find the average product of labour at the optimal units of labour and interpret your answer.
iii. Find the marginal product of labour at the optimal units of labour and interpret your
answer.

2. Temporary Services uses 4 units of labour and 2 typewriters to produce reports. The marginal
product of a typewriter is 50 pages per day, and the marginal product of labour is 500 pages
per day. The rental price of a typewriter is GHS 1 per day, whereas the wage per unit of labour
is GHS 50 per day. Is Temporary Services utilizing typewriters and labour in a cost-minimizing
manner? If not, what should the firm do?

3. Suppose the cost function of firm A, which produces two goods, is given by
C = 100 − 0.5Q1Q2 + (Q1 ) 2 + (Q2 ) 2
The firm wishes to produce 5 units of good 1 and 4 units of good 2.
i. Do cost complementarities exist? Do economies of scope exist?
ii. Firm A is considering selling the subsidiary that produces good 2 to firm B, in
which case it will produce only good 1. What is the total cost of producing them
under the separate firms as against producing them under a single firm?

4. Gifted hands Company Ltd manufactures sculpture and other clay artifacts. Currently, the
company manufactures the clay artifacts by hand even though a molding can help improve the
number of clay artifacts produced in a day. At present, each worker is paid GHS 50 per day,
but the firm has observed that employing an additional worker can increase the number of units
produced by 200 per day (assume this is constant every day). An expert in manufacturing of
clay artifacts predicts that installation of a molding machine will increase daily output by 1,800
units. Currently the firm can produce 5,400 units per day.
i. The finance officer of the firm estimates that the rental price of the molding machine
will be GHS 600 per day. Can management reduce the cost of producing the 5,400 units
per day by hiring the molding machine? Why or why not?
ii. The association of clay artifact workers of the country is planning to strike for an
increment of wages to GHS 100 per day. If the strike is successful, how would this
affect the decision in part (i) to purchase a molding machine?

5. The production function of a firm follows a Cobb-Douglas production function Q = AKαLβ.


The production department of the firm obtained monthly data on output, capital and labour for
the years 2007–2021, and estimated the linear regression results of Quantity on Capital and
Labour. The results are presented in Table 1 below:
Table 1: Regression Estimates for a Cobb-Douglas Production Function
Dependent Variable: lnQ
Standard Lower Upper
Coefficients Error t Stat P-value 95% 95%
Intercept 1.721441 0.207157 8.309841 2.44E-14 1.312626 2.130256
lnK 0.495345 0.046899 10.56184 1.57E-20 0.402791 0.587899
lnL 0.142140 0.053812 2.641436 0.008994 0.035945 0.248334
Required:
i. Write the final estimated production function in the Cobb-Douglas form (round coefficients to
2 decimal places).
ii. What type of returns to scale is being experienced by the firm? Explain
iii. The finance department believes that over the period the average wage was GHS7 per unit, the
average rent was GHS25, and the cost budget of the firm average GHS 320,000. Using the
Lagrangian approach, determine the number of capital and labour that maximises profit.
iv. What is the output that maximises profit?

6. C&C Bite Ltd currently has two branches, one that specializes in the sale of fried chicken and
french-fried potatoes, and the other that specializes in sale of local Ghanaian dishes. The branch
that deals in fried chicken with french-fried potatoes averagely spends GHS 12,000 as fixed
cost. Its marginal cost per unit is GHS 40. On the other hand, the firm that specializes in sale
of local Ghanaian dishes spends the same amount on yearly fixed cost as the other branch but
spends GHS 10 more marginal cost.
a. What is the yearly total cost, average fixed cost, average variable cost and average cost for
each branch if each branch produces 150 units of output annually?
b. Assume that the activities of both branches were done under a single firm, and that C&C bite
ltd will not have two branches but one, the yearly fixed cost of the single branch will be GHS
20,000. Its yearly total variable cost function is estimated to be VC= -0.1Q1Q2 + (Q1)2 + (Q2)2,
where Q1 is the units of fried chicken and french-fried potatoes and Q2 is the units of local
Ghanaian dishes.
i. Specify the multiproduct cost function
ii. What will be the total cost if the firm produces 150 units of local dishes and 200 units
of fried chicken with french-fried potatoes?
iii. Suppose instead that the units in (ii) above was produced under separate branches, what
would be the total cost for C&C bite Ltd?
iv. Based on the multiproduct cost function in (i) above and the quantities in (ii) above,
will C&C bite ltd be able to achieve economies of scope? Are there cost
complementarities?

7. The Gattuso Insurance Company sells 1000000 life insurance policies and 500,000 home
insurance policies at the total cost of 1500 million Ghana cedis. If the company were to sell
1,000,000 Life insurance policies only, its cost would only be 1,100 million Ghana cedis. And
if it were to sell 500,000 home policies only, then its cost would be 500 million Ghana cedis.
Required:
i. Calculate the degree of economies of scope for Gattuso Insurance using the above data
ii. Explain one reason as to why the company has economies of scope

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