XYZInc is a firm that sells output at a fixed price in the marketplace. XYZInc h
ID: 1197513 • Letter: X
Question
XYZInc is a firm that sells output at a fixed price in the marketplace. XYZInc has a production process with one variable input and one fixed input. XYZInc faces an output price of $2.53, it can purchase as much of the variable input it desires at a price of $55.00 per unit of variable input – we call the variable input L. XYZInc’s fixed costs are $90.00. Note, XYZInc cannot pick its exact level of output but it can pick only its level of L to hire.
a. Complete the table below. – fill in the blanks.
b. What is the profit maximizing level of output? Please consider calculated profits as a “guide” here. Explain how the profit maximizing level of input use is determined; hint, what are the costs and benefits of hiring each unit of the input?
c. If, for whatever reason, the price of the product were to double from $2.53, how would this affect your answer to (b)?
d. Suppose that the world changes for XYZInc in that overnight, without changing technology or without changing anything at the firm the labor is suddenly more productive. In particular assume that the marginal product of each unit of labor increases by 50%. Construct and present a table like the one used above to describe all the cost measures, etc. for XYZInc after this change.
e. After the change in technology (but ignoring any doubling of output prices as mentioned above—i.e., price is still $2.53), did XYZInc hire more or less labor? Fully explain.
Price of Output $2.53 Price of Variable Input $55.00 Fixed Costs $90.00Explanation / Answer
Profit Maximizing level of output is 105.
If price doubles, profit maximizing level of output would be 125 as MC<P for 105 and P>MC for 130
Unit of L Widgets Produced MPL Fixed Cost Variable Cost Total Cost Average Total Cost Marginal Cost Profits 0 0 ? $90 ? ? -$90.00 1 40 40 90 55 145 3.625 $1.38 -43.8 2 75 35 90 110 200 2.667 1.571 -10.25 3 105 30 90 165 255 2.428 1.833 10.65 4 125 20 90 220 310 $2.48 2.750 6.25 5 130 5 90 $275.00 365 2.807 11 -36.1 6 134 4 90 330 420 3.134 13.75 -80.98 7 127 -7 90 385 475 3.740Related Questions
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