Managerial Economics

Homework Assignment One

Due at the beginning of class on Wednesday, May 1

(28 pts.)

Name:

Directions:  Copy and paste this page into a word document and then type your answers.  Answers that are not typed will not be graded.  Please leave the questions before each of your answers (I often refer back to the question when grading).

1.  You are the owner/manager of a production facility.  Your facility produces tie-dyed T-shirts.  One of your employees can tie-dye T-shirts very quickly -- using three colors. In fact, employee one can produce 10 shirts per hour.  A second employee is slower at tie-dying (also uses three colors and only produces 7 shirts per hour) but produces shirts that look very different than the shirts made by the first employee.  Assuming that in producing the T-shirts no external costs are created (with either employee).   Is employee two necessarily less efficient than employee one.  Explain your answer and assume that you are interested in making a monetary profit.  Hint - this question is NOT about comparative advantage. (4 pts.)

2.  Candy Land grows natural (organic) cabbage (no chemical fertilizers or pesticides used).  She has an 800-acre farm.  Her planting and cultivating costs were $10 per acre and have already been incurred and cannot be reduced.  Her harvesting costs, however, are variable.  Candy's land is of uneven quality, and the yield per acre drops as she incorporates less and less productive land into her cabbage production.  She has 150 acres that will yield 20 bushels per acre, 150 that will yield 18 bushels per acre, 200 that will yield 16 bushels per acre, 150 that will yield 14 bushels per acre, and another 150 that will yield only 10 bushels per acre.

Candy figures the harvesting costs for the cabbage are $30 per acre. 

A.  Assuming she planted the entire acreage, how much of it should she harvest if, when the cabbage is mature, the going market price that she can obtain is $2.75 per bushel?  (Hint:  remember, use marginal analysis. In other words, I would set up a table with the following headings:  Acre Information (for example, for the first 150 Acres - 20 bushels), Marginal Cost (for each section of land), Marginal Revenue (for each section of land), Profit/Loss.    Show all work and back up your answer with numbers.  (5 pts.)

B.  What are Candy's sunk costs in this problem?  Explain your answer. (3 pts.)

3.  Explain why a "good" manager delegates -- and how this relates to the concept of comparative advantage (opportunity cost).  (4 pts.)

4.  You own a business that is losing money in the short run.  You are trying to decide if you should operate or shut down (while trying to sell the business).  Your total fixed costs are $3,400 per month.  If you operate you estimate that you could bring in $6,000 per month in revenue by selling 1,000 units.  Your variable costs per unit are $7.00.  Should you operate or shut down?  Explain your answer by showing how much you would lose if you operate and how much you would lose if you shut down.  (5 pts.)

5.  Assume there are only two countries and there is only one factor of production, labor. It takes 8 labor hours to produce 1 gallon of oil and 2 labor hours to produce 1 gallon of vodka in Mexico.  It takes 6 labor hours to produce 1 gallon of oil and 1 labor hour to produce 1 gallon of vodka in Russia.

A.  Which country has an absolute advantage in the production of vodka and why? (3 pts.)

B.  Which country has a comparative advantage in the production of vodka and why? (4 pts.)