Selected Readings

a.Do cost complementarities exist for this firm? b.Under what circumstances do economies of scope exist for this firm? c.Suppose that Q1 = Q2 = 2.Do cost complementarities exist? d.Suppose that Q1 = Q2 = 3.Do cost complementarities exist? e.Suppose that the firm is currently producing 5 units of Q1 and 10 units of Q2.What is the firm’s total cost of production? f. Suppose that the firm divests itself of the division selling Q1 to a competitor.How much will it cost the firm to continue producing 10 units of Q2? What is the total cost of producing both Q1 and Q2 if the firm producing Q1 produces 5 units? 6.6Suppose that per-unit labor cost of producing a single unit of output is $25,000. a.If the learning factor is 0.87 and the factor of proportionality is 2.2, estimate the per-unit labor cost of producing 151 units of output. b.If the hourly wage is constant at $25,how many labor hours are required to produce the first unit of output? How many labor hours are required per unit of output when 151 units are produced?

SELECTED READINGS

Brennan,M.J.,and T.M.Carroll. Preface to Quantitative Economics & Econometrics,4th ed.

Cincinnati,OH:South-Western Publishing,1987. Glass,J.C. An Introduction to Mathematical Methods in Economics.New York:McGraw-Hill, 1980. Gold,B.“Changing Perspectives on Size,Scale,and Returns:An Interpretative Survey.”

Journal of Economic Literature,19 (March 1981),pp.5–33. Henderson,J.M.,and R.E.Quandt. Microeconomic Theory:A Mathematical Approach,3rd ed.New York:McGraw-Hill,1980. Hope,S. Applied Microeconomics.New York:John Wiley & Sons,1999. Maxwell,W.D.“Production Theory and Cost Curves.” Applied Economics,1 (August 1969), pp.211–224. McCloskey,D.N. The Applied Theory of Price.New York:Macmillan,1982. Mills,D.“Capacity Expansion and the Size of Plants.” Rand Journal of Economics,21 (Winter 1990),pp.555–566. Nicholson,W. Microeconomic Theory: Basic Principles and Extensions,6th ed.New York:

Dryden Press,1995. Silberberg,E. The Structure of Economics: A Mathematical Analysis,2nd ed.New York:

McGraw-Hill,1990. Stigler,G.J.“The Economies of Scale.” Journal of Law and Economics,April (1958),pp. 251–274. Walters,A.A.“Production and Cost Functions:An Econometric Survey.” Econometrica (January 1963),pp.1–66.

7

Profit and Revenue Maximization

Firms transform factors of production into goods and services for sale in the market.In Chapter 5,we discussed several important production relationships at length.We saw,for example,that firms produce in the short run, but plan in the long run.The short run in production was defined at that period of time during which at least one factor of production is held constant.In the short run,firms are subject to the law of diminishing marginal product with respect to the variable inputs.We also saw that in is generally possible to produce a given level of output with several different input combinations.In other words,generally,but not always,factors of production are substitutable.The substitutability of the factors of production was illustrated diagrammatically with the use of an isoquant map,with each isoquant corresponding to a different level of output.By contrast,the long run in production was defined as the period of time in which all factors of production are variable.When all factors of production are variable, the optimal scale of the firm’s future operations becomes an important managerial decision-making consideration.

Chapter 5 left a number of important short-run production questions unanswered.For one thing,what is the firm’s “optimal”level of output? Not surprisingly,the optimal level of output is defined by the firm’s organizational objective.The output level that maximizes the firm’s profits,for example,will generally be different from the output level that maximizes the firm’s sales revenues or market share.Once the firm’s organizational objective has been defined,management must determine the least-cost combination of inputs necessary to achieve that target output level.Clearly, this will depend not only on the firm’s operating budget,but also on the