Question No. 1 (Interpreting Productivity and Price Information)
This semester, we used learning Assignments 6-9 to review production, costs, and profits under perfect competition. The point of those assignments was to set up and tie together different pieces of information about the productivity and costs of inputs and the price of output for the firm. In that context, this question calls on you to interpret the kind of information we were working with in those assignments.
Consider a firm that is perfectly competitive in its input and output markets. This firm produces a single homogeneous product using two inputs: labor (L) and capital (K). Both inputs (K and L) are flexible in the long run, but capital (K) is fixed in the short run. We denote the marginal productivity of labor as MPL, and the marginal productivity of capital as MPK. For this firm, the marginal productivities of both capital and labor decline with the amount used of that input. At the same time, the marginal productivity of each input is positively related to the amount used of the other input. More formally: ΔMPL/ΔL0, and ΔMPK/ΔL>0.
At present, the price of the firm’s output is $3 per unit, the firm’s wage rate (w) is $20 per hour and the Marginal Product of Labor (MPL) is 5 units per hour. As for Capital, the user cost of capital (r) is $ 2000 per month and the Marginal Product of Capital (MPK) is 1000 units per month.
Based on the available information, carefully explain what adjustments in the use of inputs, if any, you believe the firm would need to make to maximize profits or minimize losses both in the short run and in the long run. As part of your answer make sure that you carefully explain your reasoning, while also outlining any caveats you may have on additional information needed. Specifically, explain what additional information you would need in order to decide whether profit maximization calls for an increase or decrease in the levels of production in the long run.
Question No. 2 (The EV Chicken and Egg Problem)
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Question No. 3 (Pricing Strategies Beyond Monopoly Pricing and Price Discrimination)
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Question No. 4 (The Peloton Problem)
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