Managerial Economics

In Class Exercise Seven

1. What is the "make or buy" decision?

2.  In reality capital is not a "blob" but instead is a heterogeneous structure.  Explain.

3.  Relate operating and planning to the standard time frames that economists discuss.  What is involved (basically) in each?

4.  Graph the marginal product curve as is usually seen in standard theory.  Explain why it is shaped the way it is.

5.  What are the “three stages of production” in the short run (i.e., what are the key points in each stage)?

6.  How does the law of diminishing marginal returns relate to these stages?

7.  In what stage will the firm operate (theoretically) and why?

8.  Review again the concept of “derived demand.”  How does it relate to the value of the marginal product of an input – such as labor?

9.  Good managers (and economists) can take the concepts learned in a classroom and apply them to the real world.  That’s why understanding the concepts is crucial to being a good manager.  A good economist also understands that applying certain concepts in the real world is often easier said than done.  Therefore, discuss the problems of measuring productivity in actual work situations.  How might a manager try to estimate productivity for each of the following situations?

a.    Education (e.g., elementary and secondary education, higher education)?

b.    Government (e.g., the Social Security office, the IRS)?

c.    Manufacturing (e.g., soap and toothpaste, computers, machinery)?

d.    Finance and insurance (e.g., banks, insurance companies)?

10.  New Problem: Optimal Use of a Single Input.  Julian Smyth manages production at Taffy Apple Inc., a company that produces a variety of taffy/fruit candies.  Over the last several months, he has varied the number of employees on his caramel apple production line, and found the following relationship (per day).

a.       In the column labeled MP, calculate the marginal product of labor. (Note, make your first entry in row 6, as the change between 5 and 6 units of labor)

b.      Suppose the apples sell for $5 per apple.  Calculate the Value of the Marginal Product (VMP) in the column above.

c.       If labor costs $225 per day/per worker, how many laborers should the firm hire? Why?

Number:

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11. New Problem:  Optimal use of multiple inputs.  In his shop, Julian Valenti retrofits seat covers into automobiles.  The process can use a combination of skilled labor and unskilled labor.  Given his current mix of employees, the marginal product of the last unit of skilled labor is 60 seat covers per hour, and the marginal product of the last unit of unskilled labor is 20 seat covers per hour.  Current market rates for skilled and unskilled labor is $40/hr. and $10/hr., respectively.   Is Julian using a least cost combination of inputs?  If not, which type of labor should he use relatively more of?  Explain your answer.

12.  New Problem:  In the long run, Tim noticed that when he added 20% more of his inputs (both capital and labor), his output increased by 30%.  What is Tim’s firm experiencing with respect to the change in its size?  Explain.

            How do you know?

            What measures might Tim use to determine his returns to scale?  Explain.