Reviewing Profit Maximization

Answer questions a through e using this table: Labor Total Cost Output Revenue 12 $30,000 160 $40,000 14 $32,000 180 $42,500
a) How much does the 13th unit of labor add to output? This economic concept is called Marginal ?? Product Revenue Cost Revenue Product Resource Cost .
b) When the 161st unit of output is added, it adds how much to the firm's revenue? $ This economic concept is called Marginal ?? Product Revenue Cost Revenue Product Resource Cost .
c) An extra unit of labor adds how much to the firm's costs? $ This economic concept is called Marginal ?? Product Revenue Cost Revenue Product Resource Cost .
d) An extra unit of labor adds how much to the firms revenue? $ This economic concept is called Marginal ?? Product Revenue Cost Revenue Product Resource Cost .
e) An extra unit of output adds how much to the firms costs? $ This economic concept is called Marginal ?? Product Revenue Cost Revenue Product Resource Cost .
Here are two more problems that review the material of the previous sections. Doug produces gizmos. If he charges a price of $100, he can sell three gizmos. If he lowers the price to $90, he can sell four gizmos.
a) What is the marginal revenue of the fourth gizmo? $
b) In computing this, are we using information from his production function, the demand curve he faces, or the supply curve of inputs that he faces? ?? Production Function Demand Curve Supply Curve
c) Is Doug a price searcher or a price taker in the gizmo market? ?? Price Searcher Price Taker
The Gizmo company is selling 9 gizmos per day at $10 each. It can sell more if it lowers price; if it sells 10 its total revenue will be $99 and if it sells 11 its total revenue will be $107.80. It can produce two more gizmos by adding another hour of labor, and that extra hour of labor raises its costs by $19.00.
d) Based on these numbers, the marginal revenue of the 10th gizmo is $.
e) The approximate marginal cost of the 10th gizmo is $.
f) The marginal resource cost another hour of labor is $.
g) The marginal revenue product of another hour of labor is $.
h) Should the firm hire more labor to expand output? ?? Yes No Cannot Tell
Do not include dollar signs ($) in your answers.

Exploring Sunk Costs

Suppose there are two identical gas stations facing identical demand curves in two small towns. One of them filled up its storage tanks a week ago at a price of $1.00 per gallon. Then unexpected world events led to a dramatic increase in fuel prices, so that when the second station filled its storage tanks four days go, the price was $1.80 per gallon. In three weeks both will be refilling their tanks, but right now the cost to them would be $1.40 per gallon.
If both have the goal of maximizing profit, and both are rational, will they sell gasoline to their customers at the same price or will the second station that paid more charge a higher price? Explain.

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Copyright Robert Schenk