Economics of Production
Problem Set 1
1. Joanna French is currently working a total of 12 hours per day to produce 240 dolls. She thinks that by changing the paint used for the facial features and fingernails that she can increase her rate to 360 dolls per day. Total material cost for each doll is approximately $3.50; she has to invest $20 in the necessary supplies (expendables) per day; energy costs are assumed to be only $4.00 per day; and she thinks she should be making $10 per hour for her time. Viewing this from a total (multifactor) productivity perspective,
a) what is her productivity at present and with the new paint?
b) how would total (multifactor) productivity change if using the new paint raised Ms. French’s material costs by $0.50 per doll?
c) if she uses the new paint, by what amount could Ms. French’s material costs increase without reducing total (multifactor) productivity?
2. The XYZ company believes that the demand curve for its product is
q = 20 – 2P
where q is quantity and P is price.
a) Calculate Total Revenue, TR, Average Revenue, AR, and Marginal Revenue, MR.
b) Graph TR, AR, MR curves for all of P from $0 to $10.
(you can use Excel for this part)
c) Calculate the price elasticity of demand at a price of $5.