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 printer added 8 books to total output, while the last press added 2,500 books to total output. Is the publishing house making the optimal input choice? Why or why not? If not, how should 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, is considering buying out Beta Corporation, a small manufacturing firm that is now barely operating at a profit. You recommend the buyout because you believe that new management could substantially reduce production costs, and thereby increase profit to a quite attractive level. You collect the following product information in order to convince the CEO at Gamma Corporation that Beta is indeed operating inefficiently:

MPL = 25 PL =\$20

MPK = 15 PK =\$15

Explain how these data provide evidence of inefficiency. How could the new manager of Beta Corporation improve efficiency?

?Q6: CH 10 (20%)

You are planning to estimate a short- run production function for your firm, and you have collected the following

data on labor usage (L) and output (Q):

Labor usage Output

3??? ?1

7??? ?2

9??? ?3

11? ?5

17?? 8

17? ?10

20?? 15

24? ?18

26?? 22

28?? 21

30?? 23

a. Please key in the data into MS Excel for regression analysis. Estimate your firm’s short-run production function.

Do the parameter estimates have the appropriate algebraic signs? Are they statistically significant at the 5

percent level?

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 the firm employs 20 workers.

d. When the firm employs 20 workers, is short-run marginal cost (MC) rising or falling? How can you tell?