University of the Philippines

SCHOOL OF ECONOMICS

Economics 100.2: Fundamentals of Microeconomics

2nd Semester, AY 2018–2019
Problem Set #2

Prof. A. Arcenas P. Adriano / I. Arzadon / I. Generalao

Instructions. Answer each of the following questions concisely on a separate sheet (you may use scratch
papers). Submit your answer sheets during the discussion class on Thursday, March 14, 2019.

Chapter 6

1. The table below provides the data for a production function that relates the employment of capital
(K) and labor (L) to maximum output levels of some good Y. Assume that K and L are the only
inputs of production, and it takes time to adjust your level of capital stock.

4 Units of Capital Employed 8 Units of Capital Employed

Labor TP MPL APL Labor TP MPL APL

0 0 undefined 0 0 undefined
20 ___
1 24 ___ 1 32 ___
18 ___
2 44 ___ 2 60 ___
___ ___
3 60 ___ 3 84 ___
___ ___
4 72 ___ 4 104 ___
___ ___
5 80 ___ 5 120 ___
___ ___
6 84 ___ 6 132 ___
___ ___
7 84 ___ 7 140 ___

a. Fill in the blanks for the marginal and average products of labor given capital employment
of 4 units and 8 units
b. Suppose that 2 units of labor are employed when capital stock is 4, and when capital stock
is adjusted to 8 units, 4 units of labor are employed. Using the level of total production,
how would you define the scale of production?
c. With the capital stock level at 4 units, at what level of labor employed does the diminishing
marginal returns of labor set in?
d. Based on Table 1, briefly describe which data are relevant for short-run decision-making
and long-run decision-making.
e. True of False. Production shows diminishing marginal returns when 4 units of capital is
employed, but not when 8 units of capital is employed.

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Chapter 7

2. (Oscar owns a factory that produces pins, and his production function only includes Labor (L) and
Capital (K) as factor inputs. Oscars pays Php 5,000 for every additional worker. In the short run,
he needs to compute for the marginal product of labor, his total costs, and other cost factors.
a. Help Oscar by completing the information on the table below:
Marginal Total
Pins per Total Cost Average Marginal Total Fixed
Workers Product Variable
hour (Php) Cost Cost Cost
of Labor Cost
0 0 -- 10,000 -- --
1 30 15,000
2 52 20,000
3 64 25,000
4 70 30,000
5 72 35,000

b. Sketch the total product curve and MC curve.

c. What explains the shape of the MC curve? Explain briefly.
d. The average cost (AC) is at its minimum in which interval of production level?
e. True or False. The table above shows that the as the production increases, both total fixed
cost and total variable cost increase.

3. Refer to the graph on the right.

a. Label the curves:
i. Curve 1:
ii. Curve 2:
iii. Curve 3:
iv. Curve 4:
b. At point ___, MC is pulling the AC down. At point
___, AC is as its minimum. At point ___, MC is
pulling the AC up.

4. Mr. Toledo, a farmer, has decided to lease his 4 hectares of land in his side yard to the local
government office to use for extra parking (the office is willing to pay Php 60,000 per year for this)
rather than planting cacao on the property. Given that direct costs estimates for seeds, water,
labor, and fertilizer is Php 37,000 per year and the annual revenues from the sale of the cacao is
Php 80,000, did Mr. Toledo make the right decision to lease the land? What are his opportunity
costs in this case? Briefly explain.

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 5. The figure below illustrates a production function involving the employment of inputs L (Labor) and
K (Capital). The two curved lines are equal-product lines for outputs of 300 and 420 units. AB and
CD are equal-cost lines. AB marks a cost outlay of Php 36.

a. From examination of AB, the price of Labor (L) must be _____.

b. From examination of AB, the price of Capital (K) must be _____.
c. The minimum total cost of producing 300 units of output is _____.
d. The average cost of producing 300 units (given the firm has chosen the minimum cost
combination of inputs) is ______.
e. The quantities of L and K used to produce 300 units of output at minimum cost could be
______.
f. Given the above prices of L and K, equal-cost line CD must indicate a total outlay of
_______.
g. True or False. The slope of the isoquant with q=420 at point E is equivalent to the slope of
line AB.

Chapter 8

6. Modified True or False: Identify the following statements as True or False. If the statement is false,
modify the statement to make it true.
a. The competitive firm sets price equal to marginal cost.
b. The P = MC rule for competitive industries holds for upward-sloping, horizontal, and
downward-sloping MC curves.
c. A firm’s supply curve depends only on its marginal cost. Any other cost concept is irrelevant
for supply decisions.
d. A perfectly competitive firm’s shutdown point comes where price is less than minimum
average cost.
e. A competitive firm will produce output up to the point where price equals average variable
cost.

7. Suppose you are a perfectly competitive firm producing computer memory chips in the short run.
Your maximum production capacity is 1000 units per year. Your marginal cost is P10 per chip up
to capacity. You have a fixed cost of P10,000. What are your profit-maximizing levels of production
and profit if the market price is:
a. P5 per chip
b. P15 per chip
c. P25 per chip
Explain your answers.

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 8. Consider an atomistic profit-maximizing wheat firm facing the following production costs (in Php):

Labor Quantity Fixed Variable Total Marginal Average Average

Cost Cost Cost Cost Total Cost Variable Cost
1 16 80 5.00
2 40 320 3.33 8.00 4.00
3 60 160 240 4.00 4.00
4 72 480 6.60 4.40
5 80 400 10.00 7.00
6 84 640

a. Fill out the missing elements in the table.

b. Assuming a perfectly competitive market, how much will a profit-maximizing firm produce
given that the price of its product is equal to P20?
c. Suppose that the price of its product falls to P3.50. How much should a profit-maximizing
firm produce? Explain.
d. What is the net profit of the firm if price is equal to P5?
e. Suppose that fixed costs increased by P40. Recalculate the figures in the table below.
What is the profit-maximizing level of output to be produced by the firm if the market price
of wheat is P6.67?
f. From d, will the original ‘shutdown point’ quantity change? Explain.

Chapter 9

9. Modified True or False: Identify the following statements as True or False. If the statement is false,
modify the statement to make it true.
a. A monopolist maximizes profits when P=MC.
b. The more elastic the demand is, the higher the monopolist can set its price above its MC.
c. Monopolists ignore the marginal principle.
d. Monopolists maximize their profit. They therefore produce more than perfect competitors
and the monopolists’ price is lower.
e. A firm maximizing its profits will always charge the highest price that the consumers will
bear.

10. Beta Computing Inc., a profit-maximizing monopolistic competitive firm, has the following revenue
and cost schedule (in Php).

Total Marginal Total Marginal Average

Quantity Price Revenue Revenue Cost Cost Cost
10 23 230 – 340 – 34
20 400 17 400 6 20
30 18 16
40 640 10 580 10
50 14 12 14
60 12 720 2 840 14
70 10 700 –2 1,020 14.57
80 640 26 16

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 a. Complete the schedule above.
b. What is the profit maximizing output for Beta Computing Inc.?
c. What can you say about the relationship between average revenue and price? How about
marginal revenue and price?
d. What is the level of profit that can be attained by Beta Computing Inc. at the profit-
maximizing price and output?
e. Draw and label the following in one graph.
i. Marginal Revenue Curve
ii. Demand Curve
iii. Marginal Cost Curve
iv. Average Cost Curve
v. Profit-maximizing price and output

11. What is the Marginal Revenue when the demand is unitary elastic? Explain.

12. Will a profit-maximizing monopolistic competitor produce output at the price inelastic region of the
demand curve? Justify your answer.

Chapter 10

13. Identify the type of market structure (Perfectly Competition, Monopoly, Oligopoly, Monopolistic
Competition) of the following goods:
a. Water distribution in the province of Rizal
b. Cabbages sold in a retail store
c. Internet services in the Philippines
d. Newly-released mobile phones
e. Electricity distribution in Metro Manila
f. Black polo shirts in shopping malls

14. The table below shows the payoff table for two competing firms, CookiEmpire and CookieDookie.
Each firm must choose to play one of the two strategies, collude or cheat. The payoff to the firms
depend not only on their respective strategies but also on the strategy their rival chooses. The
numbers inside the cells show the profits the two firms can generate depending upon their choice
of strategies. For example, both firms colluding will increase CookiEmpire’s profit by P200 and
CookieDookie’s by P500.

CookieDookie
Collude Cheat

P500 P200
Collude
CookiEmpire

P200 - P200

- P100 P250
Cheat

P400 -P100

a. Which strategy is dominant for CookiEmpire?

b. Which strategy is dominant for CookieDookie?

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 c. Which cell/set of strategies (e.g. {Collude, Cheat} if CookiEmpire colludes and
CookieDookie cheats) is a dominant equilibrium?
d. Which cell/set of strategies is a Nash equilibrium?
e. True or False. Nash equilibrium always gives positive profits for all players involved in the
strategic interaction.

15. Complete the table below. Characteristics for the Perfectly Competitive Market is already given:
Monopolistic
Perfect Competition Monopoly Oligopoly
Competition
Demand Curve faced by an
Horizontal
individual firm
Number of Firms Many
Profit-maximizing condition MR = MC
Relationship of P and MR P = MR
Profits in the long run Zero economic profit

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