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Tutorial 4 Student Version

This document is a tutorial exercise for a microeconomics course at the University of the Western Cape, focusing on production functions, cost analysis, and competitive market behavior. It includes questions on optimizing capital-labor ratios, analyzing the impact of wage changes, and understanding profit maximization and producer surplus. The exercise is designed to assess students' understanding of key microeconomic concepts over a specified week in October 2025.

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Joshua Cloete
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18 views1 page

Tutorial 4 Student Version

This document is a tutorial exercise for a microeconomics course at the University of the Western Cape, focusing on production functions, cost analysis, and competitive market behavior. It includes questions on optimizing capital-labor ratios, analyzing the impact of wage changes, and understanding profit maximization and producer surplus. The exercise is designed to assess students' understanding of key microeconomic concepts over a specified week in October 2025.

Uploaded by

Joshua Cloete
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

UNIVERSITY OF THE WESTERN CAPE

DEPARTMENT OF ECONOMICS
ECO231 – MICROECONOMICS

Tutorial Exercise 4 (Chapter 7 & Chapter 8)


Week 11: (6 October - 10 October 2025) Tutorial Marks: ………/20

Surname, Initial: _________________________________ Student No:________________

Question 1 __ ____________ [9]

Davy Metal Company produces brass fittings. Davy's engineers estimate the production
function represented below as relevant for their long-run capital-labor decisions.
Q = 500L0.6K0.8,
where Q = annual output measured in pounds,
L = labor measured in person hours,
K = capital measured in machine hours.
The marginal products of labor and capital are:
MPL = 300L-0.4K0.8 MPK = 400L0.6K-0.2
Davy's employees are relatively highly skilled and earn $15 per hour. The firm estimates a
rental charge of $50 per hour on capital. Davy forecasts annual costs of $500,000 per year,
measured in real dollars.

1.1 Determine the firm's optimal capital-labor ratio, given the information above.

1.2 How much capital and labor should the firm employ, given the $500,000 budget? [3]
Calculate the firm's output. [2]

1.3 Davy is currently negotiating with a newly organized union. The firm's personnel
manager indicates that the wage may rise to $22.50 under the proposed union contract.
Analyze the effect of the higher union wage on the optimal capital-labor ratio and the
firm's employment of capital and labor. What will happen to the firm's output? [4]

Question 2 __ ____________[3]
A firm produces a product in a competitive industry and has a total cost function C  50 
4q  2q2 and a marginal cost function MC  4  4q. At the given market price of $20, the
firm is producing 5 units of output. Is the firm maximizing its profit? What quantity of output
should the firm produce in the long run?

Question 3 __ ____________ [3]


What is the difference between economic profit and producer surplus for a perfectly
competitive firm operating in the short run?

Question 4 __ ____________ [5]


Discuss why a perfectly competitive firm that incurs losses choose to produce rather than shut
down in the short-run?

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