1

You”ve been hired by an unprofitable firm to determine whether it should shut down its unprofitable operation.

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage (per worker) is $80, and the price of the firm”s output is $25. The cost of other variable inputs is $400,000 per day. Although you don”t know the firm”s fixed cost, you know that it is high enough that the firm”s total costs exceed its total revenue.

Provide a report to management of the firm as to whether or not it should continue to operate at a loss? Be sure to show your work to support the decision you outlined in your report.

2
Sometimes market activities (production, buying and selling) have unintended positive or negative effects outside the market”s scope. This is called an externality. Suppose that you are a policy maker concerned with correcting the effects of gases and particulates emitted by and local power plant. What tools would you use? What would be the benefits of the action? What would be the costs? How would you decide what was the best level of emission reduction? Why do you think your approach would be better than others? (hint: see chapter 31)

3
Suppose the price of apples rises from $3 a pound to $3.50 and your consumption of apples drops from 35 pounds of apples a month to 20 pounds of apples. Calculate your price elasticity of demand of apples. What can you say about your price elasticity of demand of apples? Is it Elastic, Inelastic, or Unitary Elastic? Be sure to show the work you used to support your answer.