Problems 1. Assume that a purely competitive firm uses two resources, labor (L)a

Question

Problems 1. Assume that a purely competitive firm uses two resources, labor (L)and capital (C), to produce a product. The market price of this product is $1.00. The Marginal Product (MP) and prices of the resources (Pl) and (Pc)are shown in the following four situations below: ---------------------------------------------------------------------------------------- MPl MPc Pl Pc MRPl MRPc

I 30 20 30 40 ______ ______

II 20 20 10 10 ______ ______

III 10 15 10 15 ______ ______

IV 30 40 10 5 ______ ______

a. Calculate the marginal revenue product (MRP) of labor and capital in four situations and put in the above table. b. Which situation would the firm be maximizing its profit? _______

2. Suppose a firm expects that a $15 million expenditure on R&D will result in an improved product which will increase its revenue by a total of $27 million 1 year from now. The firm also estimated the production cost of the improved product would be $25 million. a. What is the expected rate of return on this R&D expenditure?________

b. Suppose the firm can get a bank loan at 10% to finance its $15 million, will the firm undertake the project? ____________ Explain.________________________________

c. Now suppose the interest rate of the loan rises to 15%, will this interest rate change the firm's R&D decision? ___________ Explain__________________________________

d. What is the highest interest rate of the loan that this firm will undertake the project?____

3. Resources are used in production, and resources' prices are the cost of production.

a. Resources demand is a derived demand, this demand derived from ______________

b. The rule of employing labor required: MRP = Wage of labor

    MRP depends on 1________ and 2.______.

In perfect competition, if the price of X is $4, and the marginal product of X is 5.   

The MRP is ____.

Explanation / Answer

1. a. Marginal revenue product of labor=Marginal product of labor*Price of the product

MPl      MPc       Pl     Pc             MRPl              MRPc

I    30        20          30    40              __30____            20______

II    20        20          10    10              __20            ___20___  

III   10        15           10   15              ___10___            15______  

IV   30        40           10    5               __30____            40______

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b. Profits are maimised when MRPl=wage and MRPc=Pc

So, firm will maximise profits in situation III.

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