1. Suppose that Amber's demand for gasoline is given by G = 1000 - 200PG, where G stands for gallons of gas and PG represents the price of gas.
a. Suppose gas sells for $2 per gallon. What is Amber's consumer surplus?
b. Suppose the price of gas rises to $3 per gallon. What is the change in Amber's consumer surplus?
2. Suppose you mange a firm with two production plants. The marginal product of labor at plant 1 is MP1 = 1400 - L1 where L1 is the number of workers employed in plant 1. The marginal product of labor at plant 2 is MP2 = 2000 - L2 where L2 is the number of workers employed in plant 2. Given that you have 1,000 workers, what is the best allocation of workers between the two plants?
3. Suppose a firm produces its output in two different plants. Production costs at plant 1 are given by C1 = 4(Q1)2, where Q1 is the amount of production at plant 1. The production costs at plant 2 are given by C2 = 2(Q2)2, where Q2 is the amount of production at plant 2. The
corresponding marginal costs at each plant are MC1 = 8Q1 and MC2 = 4Q2. If the firm produces a total of 24 units of output, how much output should it produce at each plant?
4. Suppose a competitive firm produces spaghetti dinners. The market price of a spaghetti dinner is $20. The cost of making the dinners is given by C(Q) = 10Q + (Q2/160). The marginal cost is given by MC = 10 + (Q/80).
a. How many spaghetti dinners should the firm make each day?
b. What if the firm has avoidable fixed costs of $1562.50?
c. What is the firm's supply function if there is no avoidable fixed cost?
d. What is the supply function if the firm has avoidable fixed costs of $1562.50?
5. Suppose the government wants to increase the price of a specific agricultural product.
Discuss the welfare effects of four possible policies: price floor, price support, production quota and voluntary production reduction. Which policy is least efficient? Discuss the differences in the benefits to farmers and the cost to the government.