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Questions to Answer are on Document B Below
Document B (Questions that need to be Answered):
My impression of the gasoline industry is that there is 1) a wholesale price paid to refiners by gas stations who receive large shipments of gasoline in tanker trucks on (roughly) a daily basis, and 2) a retail price for customers set by individual gas stations, which can change multiple times per day. Some people get upset at mid-day changes in the retail price, arguing that all gasoline purchased from a tanker truck early in the morning at a particular wholesale price should be sold at the same retail price throughout the day (i.e., there should be a constant mark-up over the wholesale price). What defense could be given to support the phenomenon of changing retail prices throughout the day, even if the earlier wholesale price has not changed?
a. The payment of the wholesale price at an earlier time is a sunk cost and does not have any bearing on the current market (retail) price.
b. The retail price must exclude the transaction costs of the tanker trucks’ transportation expenses.
c. The current retail price is considered a sunk cost and should be ignored (even if its price fluctuates); the wholesale price is an avoidable cost that the gas station can resell after a customer has purchased the gasoline.
d. The wholesale price is considered a variable cost, but the retail price is considered a fixed cost and should not fluctuate.
You have collected the following data on output and total variable costs:
Over what range of output does this firm exhibit increasing returns (increasing MPMP), and diminishing returns (decreasing MPMP)?
a. Increasing returns for output levels at 4 and lower and decreasing returns for output levels at 5 and higher.
b. Increasing returns for output levels at 7 and higher and decreasing returns for output levels at 6 and lower.
c. Increasing returns for output levels at 6 and lower and decreasing returns for output levels at 7 and higher.
d. Marginal costs are always less than fixed costs, so increasing returns is experienced over the whole range of output.
Current fixed costs for the company equal $120. Draw two graphs, both with QQ on the horizontal axis: one graph shows TVCTVC and TCTC, and the other shows AVCAVC, ACAC, and MCMC. Suppose that the government imposes a $30 property tax hike on all businesses; how will that affect your two graphs; i.e., which cost curves will be affected and how?
a. TC and AC will both shift up by $30/Q (i.e., $30 divided by Q).
b. The property tax will shift up TC by $30 and AC by $30/Q (i.e., $30 divided by Q).
c. TCTC will shift up by $30 while AC and MC will shift down by $30/Q (i.e., $30 divided by Q).
d. MC will shift up by the amount of the tax (i.e., by $30).
Suppose instead that the government considers your production process to be polluting and imposes a $6 tax per unit produced. How does this tax increase compare to the property tax increase, in terms of the effect on your company’s cost curves?
a. Since the per-unit tax reduces profitability, it will shift all the curves downward by $6×Q (i.e., $6 times Q).
b. The per-unit tax will affect fixed costs, so it will shift up TC and AC, but not the TVC, AVC, or MC curves.
c. A per-unit tax will shift up all the curves (TC, TVC, AVC, AC, and MC).
d. The per-unit tax will only affect and shift up the marginal and average cost curves; the others will remain where they are.
Your boss says, “either of these taxes is going to force us to change our production levels.” Given what you know about optimization analysis, how would you respond?
a. Optimization depends partly on marginal cost, which is not affected by the property tax, though it is by the per-unit tax. The property tax won’t change the optimal Q but the per-unit tax may change the optimal Q.
b. Since neither tax is a true “cost” of production (they are unlike paying salaries or buying raw materials), then it is impossible to say whether the optimal Q is affected.
c. Since both taxes alter the cost curves (in different ways), they both necessarily alter the optimal Q for the company.
d. Optimization depends partly on marginal cost but also on marginal benefit. The property tax does not affect MC but does affect MB, so it could change the optimal Q. The per-unit tax affects MC and MB equally, so it would not change the optimal Q.
Questions 6 – 7
You are HR director for a growing law firm in Tampa, Florida, which currently has need of writing 30 legal briefs every hour. Each of your company’s attorneys can write on average five briefs per hour. You are considering hiring four paralegals to shoulder the load; each paralegal is a bit slower than the attorneys and can write on average only 2.5 briefs per hour. You scan the current wages in the Tampa area (https://www.bls.gov/oes/current/oes_45300.htm) and notice that the attorneys in your company earn the local occupational median wage of $41.64 per hour, but that the prospective four paralegals will likely want to get paid their local occupational median wage of $23.66 per hour.
Would your company save money in the writing of the 30 legal briefs by hiring the four new paralegals and firing some attorneys?
a. No. The ratio of wages (lawyer wage divided by paralegal wage) is greater than the ratio of marginal products (MP lawyers / MP paralegals), so the company should prefer to retain lawyers and should not hire the paralegals.
b. Yes. The hiring of the paralegals increases the marginal product per dollar of lawyers and reduces the MP per dollar of paralegals, so the company benefits when the MP per dollar of the newly-hired paralegals decreases.
c. Yes. Since the paralegals are less productive than the attorneys (in terms of writing speed), they would be cheaper in terms of cost per hour of writing. The company should hire the four paralegals.
d. No. The marginal product per dollar for lawyers is greater than the MP per dollar for paralegals, so the company should not hire the paralegals. The total cost of writing 30 legal briefs using only lawyers is less than the total cost of writing 30 legal briefs using four paralegals and four attorneys.
The local Tampa Paralegal Union has observed that the Bureau of Labor Statistics projects that employment of paralegals over the next decade will rise considerably faster than the employment of lawyers (https://www.bls.gov/emp/ep_table_107.htm) because paralegals are becoming more skilled. As evidence, they cite newly-graduated paralegals who are able to write on average 3.75 briefs per hour. If the other values remain the same (attorney wage and writing speed, need for 30 briefs per hour), would the company save money in the writing of the 30 legal briefs by hiring four newly-graduated paralegals and firing some attorneys?
a. Yes. The four paralegals lead to a minimization of marginal product per dollar, which is preferred by the company.
b. No. The higher productivity of the attorneys is the only relevant factor and since the paralegal marginal product is still less than that of attorneys, they should not be hired.
c. Yes. The increased productivity results in the marginal product per dollar of paralegals being above the marginal product per dollar of lawyers. The cost of using only lawyers is now more expensive than using four paralegals and four lawyers.
d. No. The cost of the four paralegals is more than the cost of three attorneys, so paralegals produce a single legal brief more expensively than attorneys.
Questions 8 – 9
You work for a company that is being accused of monopoly behavior, given its large size. Comparisons are made to the industry standard, where each establishment has on average about 16.3 employees. Your company is bigger than that, but you want to provide evidence against the monopoly charges.
You’ve collected data at different times in your company’s history, when you had different amounts of capital.
In 2007, SRATC=3Q2−74Q+550In 2010, SRATC=7Q2−52Q+210In 2015, SRATC=4.5Q2−73Q+335
After plotting these three different SRATC curves (have QQ go from 0 to 20), what do you notice about how your company’s size and costs have changed as time has gone on?
a. The firm was smallest in 2007 and had medium costs; was largest in 2015 and had the lowest costs; and was a medium size but had the highest costs in 2010.
b. At the beginning of the period, the firm was smallest but enjoyed the lowest costs. By the end of the period, the firm had expanded to its largest size and also had its highest costs.
c. The firm contracted in size as time went on but had increased costs as well.
d. In 2007, the firm was relatively large with medium costs. In 2010, the firm was much smaller, but costs were even higher than in 2007. In 2015, the firm settled into a medium size and had the lowest costs of any of the years.
Make another column labeled “LRATC” that includes three points: 2010’s SRATC when Q = 2 2015’s SRATC when Q=8, and 2007’s SRATC when Q=17. Plot a 2nd-degree polynomial trendline to represent your company’s LRATC.
In a more competitive industry with smaller firms, typical LRATC curves follow LRATC=6Q2−46Q+150. Using all available information in this question, which would be a good argument that could be used to justify your company’s size?
a. While our costs are higher than competitive firms, we are actually smaller in scale than they are. The total cost (high per unit cost but low output) for our firm is actually less than for smaller firms.
b. Smaller firms have their minimum average total cost at a low amount of output, but our minimum average total cost is actually even lower than theirs, even though it occurs at a higher amount of output.
c. Even though the LRATC curves look different, the minimum points, and the optimal output associated with them, are actually equivalent. Thus, there is no qualitative difference between our firm’s efficiency and that of smaller firms.
d. Our firm’s costs may be higher than smaller firms, but our optimal output far exceeds theirs. The improvement in volume compensates for the slightly higher costs.
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