Managerial Economics

In Class Exercise Four

1.  a. Explain how the concept of diminishing marginal returns relates to the upward sloping supply curve.

b. Explain why consumers are really behind resource or input costs.

2.  Explain why diminishing marginal returns is a "short run" concept.

3.  Graphically show how each of the following would change the supply curve for oranges:

    a.  a new production technology is introduced

    b.  the price of grapefruit increases (a substitute in production)

    c.  the price of fertilizer increases (resource)

    d.  more sellers enter the orange market

4.  a.  Graphically illustrate where producer surplus is on a market graph -- then explain what it means.

     b.   Assume Qs = -30 + 5P

            At the price of $12, what is producer surplus?

5.  Consider the market supply schedule for Bob's Burgers.  The supply function is given by

Q_s = -30 + 10P - 6W - 3M, where

P = the price of the Burgers

W = the average hourly wage for labor

M = an index measuring materials costs (hamburger, pickles, etc.)

a.  At what price would the supply curve intersect the P axis - when Q = 0? (Assume W and M are zero right now).

b.  If W = 7 and M = 6, what is the market supply curve or Quantity supplied?

Q_s        =        

            =         

Plot this on a graph using 3 or 4 prices - start with the price that would cause Qs = 0 and go up from there.

c.  Now, suppose that M decreases to 4, then what happens to supply, or to quantity supplied?

Q_s        =        

            =      

There is a change in supply

Plot this on your same graph above using 3 or 4 prices - start with the price that would cause Qs = 0 and go up from there.  What did your supply curve do?  Why?

6.  Consider the market supply schedule for Cal's Burgers.  The supply function is given by

Q_s = -20 + 12P - 4W - 2M + 2Pcp - 4Psp, where

P = the price of the Burgers

W = the average hourly wage for labor

M = an index measuring materials costs (hamburger, pickles, etc.)

Pcp = price of a complement in production

Psp = price of a substitute in production

If W = 3 and M = 4, Pcp (price of frying grease) = 5 and Psp (price of hot dogs) = 2 what is the market supply curve or Quantity supplied?

Q_s        =        

            =     

If the price of Cal's hamburgers is $5.00, how many will he supply?