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12.8: Exercises for Chapter 12

  • Page ID
    108442
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    EXERCISE 12.1

    Aerodynamics is a company specializing in the production of bicycle shirts. It has a fixed capital stock, and sells its shirts for $20 each. It pays a weekly wage of $400 per worker. Aerodynamics must maximize its profits by determining the optimal number of employees to hire. The marginal product of each worker can be inferred from the table below. Determine the optimal number of employees. [Hint: You must determine the VMPL schedule, having first computed the MPL.]

    Employment 0 1 2 3 4 5 6
    Total output 0 20 50 75 95 110 120
    img439.png
    img440.png
    EXERCISE 12.2

    Suppose that, in Exercise 12.1 above, wages are not fixed. Instead the firm must pay $50 more to employ each individual worker: The first worker is willing to work for $250, the second for $300, the third for $350, etc. But once employed, each worker actually earns the same wage. Determine the optimal number of workers to be employed. [Hint: You must recognize that each worker earns the same wage; so when one additional worker is hired, the wage must increase to all workers employed.]

    EXERCISE 12.3

    Consider the following supply and demand equations for berry pickers. Demand: W=22–0.4L; supply: W=10+0.2L.

    1. For values of img446.png, calculate the corresponding wage in each of the supply and demand functions.

    2. Using the data from part (a), plot and identify the equilibrium wage and quantity of labour.

    3. Illustrate in the diagram the areas defining transfer earnings and rent.

    4. Compute the transfer earnings and rent components of the total wage bill.

    EXERCISE 12.4

    The rows of the following table describe the income stream for three different capital investments. The income flows accrue in years 1 and 2. Only year 2 returns need to be discounted. The rate of interest is the first entry in each row, and the project cost is the final entry.

    Interest rate Year 1 Year 2 Cost
    8% 8,000 9,000 16,000
    6% 0 1,000 900
    10% 4,000 5,000 11,000
    1. For each investment calculate the present value of the stream of services.

    2. Decide whether or not the investment should be undertaken.

    EXERCISE 12.5

    Nihilist Nicotine is a small tobacco farm in south-western Ontario. It has three plots of land, each with a different productivity, in that the annual yield differs across plots. The output from each plot is given in the table below. Each plot is the same size and requires 3 workers and one machine to harvest the leaves. The cost of these inputs is $10,000. If the price of each kilogram of leaves is $4, how many plots should be planted?

    Land plot Leaf yield in kilograms
    One 3,000
    Two 2,500
    Three 2,000
    EXERCISE 12.6

    The timing of wine sales is a frequent problem encountered by vintners. This is because many red wines improve with age. Let us suppose you own a particular vintage and you envisage that each bottle should increase in value by 10% the first year, 9% the second year, 8% the third year, etc.

    1. Suppose the interest rate is 5%, for how many years would you hold the wine if there is no storage cost?

    2. If in addition to interest rate costs, there is a cost of storing the wine that equals 2% of the wine's value each year, for how many years would you hold the wine before selling?

    EXERCISE 12.7

    Optional: The industry demand for plumbers is given by the equation W=50–0.08L, and there is a fixed supply of 300 qualified plumbers.

    1. Draw a diagram illustrating the supply, demand and equilibrium, knowing that the quantity intercept for the demand equation is 625.

    2. Solve the supply and demand equations for the equilibrium wage, W.

    3. If the plumbers now form a union, and supply their labour at a wage of $30 per hour, illustrate the new equilibrium on your diagram and calculate the new level of employment.


    This page titled 12.8: Exercises for Chapter 12 is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Douglas Curtis and Ian Irvine (Lyryx) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.