Question

1. The Bungalow Bill Accounting Service, LLC uses computer technology and data-entry operators to provide accounting services in a competitive market. The price for each statement is $200.  Total fixed costs are $1500/week.

Data Entry Operators	# of Statements per week	Marginal Product	Total Revenue
0	0.0
1	5.0
2	9.0
3	12.0
4	14.0
5	15.5
6	16.5
7	17.0

1. How many data entry operators would BBAS, LLC hire at a weekly wage of $250 if it were attempting to maximize profits?

2. Determine the firm’s profits.

3. Suppose a decrease in demand reduces the market price to $150 per statement.   
   1. Determine the firm’s profits
   2. Should Bill stay open in the short run? Explain.
   3. What should Bill do in the long run?  Explain.

2. Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each successive worker (so that the second worker must be paid $9, the third $12, and so on). The marginal revenue product of labor is given in the table below.

Units of Labor   Marginal Revenue Product

0

1. $30

2. $24

3. $18

4. $15

5. $12

6. $10

1. Draw the firm’s labor supply, labor demand and marginal resource cost curves.
2. What will be the competitive equilibrium wage rate and the level of employment?
3. What will be the wage rate and the level of employment under monopsonistic conditions?

3.  The following table shows the hourly output per worker in two industries in the United States and Canada.

            Pretzels                        Beer

United States            8                               6  

Canada                    1                                 2

1. Explain which country has an absolute advantage in the production of beer and which country has the absolute advantage in the production of pretzels. Why?
2. Explain which country has a comparative advantage in the production of pretzels and which country has the comparative advantage in the production of beer. Why?
3. What are the terms of trade from the perspective of the United States

Answer 1

Q1) The price for each statement = 200, Total fixed costs = 1500

Data entry operators	Number of statement	Total Revenue	Marginal total revenue
0	0	0	-
1	5	5 * 200 = 1000	1000/1 = 1000
2	9	1800	1800-1000/2-1 = 800
3	12	2400	600
4	14	2800	400
5	15.5	3100	300
6	16.5	3300	200
7	17	3400	100

a) Profit maximizing condition is MR = MC, marginal cost = weekly wage paid for each data entry operator = 250,

So, when MR = 250, that is the profit-maximizing condition,

so, 250 lies in between 300 and 200, so will lie between number of statments 15.5 and 16.5, so, the profit maximizng output = 16. So, the profit maximizing number of data operators = 5.

b) The firms profit = Total Revenue - Total Cost,

Total cost = 2750, Fixed cost = 1500, Variable cost = 250 * 5 = 1250

Maximum profit = 3100 - 2750 = 350

c) Now, when price of statement reduces to 150,

Data entry operators	Number of statement	Total Revenue	Marginal total revenue
0	0	0	-
1	5	5 * 150 = 750	750/1 = 750
2	9	1350	1350-750/2-1 = 600
3	12	1800	450
4	14	2100	300
5	15.5	2325	225
6	16.5	2475	150
7	17	2550	75

So, MR = MC, MC = 250, MR = 250 for maximum profit, between 300 and 225, so, profit maximizing number of entry operators = 4.

Total revenue = 2100,

Total Cost = 1500 + 250 * 4 = 2500,

Profit = 2100 - 2500 = -400,

i) So, there is a loss of -400.

ii) Bill should stay open in the short run, only if price is greater than the average variable cost,

So, average variable cost = variable cost/output, = 250 * 4/14 = 1000/14 = 71.42

So, as price = 150, is greater than 71.42, Bill should stay open in the short run.

iii) A firm's shutdown point is the minimum point of the average total cost curve, and if price is less than the average total cost curve, the firm needs to shut down. As in the long run, all costs are variable costs, there are no fixed costs.

So, total costs = 1500 + 1000 = 2500, average total cost = 2500/14 = 178.57 ,

So, as the price = 150, is lesser than 178.57, Bill needs to be shut down in the long run.

As per rules, have answered the first four sub parts of the first question. Thank you.