Assignment 5 Economics

Managerial Economics
Assignment No. 5
Dr. Fakhry Eldin Elfiky
Name:
Mahmoud Mohamed Raafat
Group:
( MBA )
Page
1
Question (1)
A firm has the following short-run production function:
Q = 50 L +6 L 0.5L
a- when does the law of diminishing returns take effect?
The law of diminishing returns takes effect when the marginal production
reaches its maximum,
That means the slope of MPL curve = 0
So we can get this point by the following :
MPL = 50 + 12L - 1.5L
Max MPL is when d MPL = zero
dL
d MPL = 12- 3L = 0
dL
12 = 3L
L =4
b- Calculate the values for labor over which stages I , II , III

occur.
Stage 1
-
Starts from the origin that means L = 0
End when APL = MPL and that happens when APL is at its
maximum, That means when the slope of APL curve = 0
APL = (50 L +6 L 0.5L )

L
= 50 + 6 L 0,5 L
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2
dAPL = 6 - L = 0
dL
So
L=6
Stage 2
-
Begins from the point of end of stage 1 when L = 6
Ends when MPL = 0
MPL = 50 + 12L - 1.5L = 0
L= b b2 - 4ac
2a
= 12144 - (4-1.550)
3
L = 11
Stage 3
-
Begins from the point of end of stage 2 when L = 11
Ends when L =
To summarize :
Stage 1
: from
L=0
to
Page
3
L=6
Stage 2
: from
Stage 3 : from
L=6
to
L = 11
L = 11
to
L = infinity
C- Assume each worker is paid LE 10 per hour and works a 40 hour

week, How many workers should the firm hire if the price of the
output is LE10 per unit ? Suppose the price of the output falls to LE
7.50. What do you think would be the short run impact on the
firms production ? The long run impact?
The optimal number of worker is the number who achieves the maximum
profits and that will happened when MRP = MLC
When the price = 10
MRP = MPL P = 10 (50 + 12L - 1.5L ) = 500+ 120L -15 L
MLC = 10 40 = 400
So
500+ 120L -15 L = 400
100 + 120L - 15 L = 0
L= b b2 - 4ac
2a
= 12014400 - (4-15100)
30
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4
L = 8.76 = 9
When the price = 7.5

MRP = MPL P = 7.5 (50 + 12L - 1.5L ) = 375 + 90 L -11.25 L
MLC = 10 40 = 400
So
375 + 90 L -11.25 L = 400
-25 + 90 L -11.25 L = 0
L= b b2 - 4ac
2a
= 90 8100 - (4-11.25-25)
22.5
L = 7.71 = 8
The short run impact on the firms production

Q = 50 L +6 L 0.5L
Q = (50 9) + ( 6 81 ) (0.5 729 ) = 571.5 units
Q = (50 8) + ( 6 64 ) (0.5 512 ) = 528 units
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5
The production decreased by 43.5 units as because the number of worker

changed from 9 workers to 8 workers as a result of changing in price from
LE 10 to LE 7.5
The long run impact on the firms production

There is no impact because we are still in stage 2 also we have only one
variable until now .
Question (2)
2- Following are different algebraic expression of the production
function. Decide whether each has constant, increasing, or
decreasing return to scale .
0.75 0.25
1- Q = 75 L
0.25 + 0.75 = 1
(CRTS ) constant return to scale
0.45 0.40 0.15
2- Q = 75 L
0.15 + 0.40 + 0.45 = 1

(CRTS ) constant return to scale
0.60 0.70
3- Q = 75 L
0.70 + 0.60 = 1.30

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6
(IRTS ) increasing return to scale
4- Q = 100 + 50 L + 50 K
If we use 10 units of each input,
Q = 100 +( 5010)+( 5010) =1100 unit
And if we assume that each input will be doubled,
Q = 100 +( 5020)+( 5020) =2100 unit
So Q < L,K
So EQ < 1
(DRTS ) Decreasing return to scale
5- Q = 50 L + 50 K
Q = (50 4)+( 504) =400 unit
Q = ( 5016)+( 5016) =1600 unit
So Q > L,K
So EQ > 1
6- Q = 50 L + 50 K + 50 LK
Q = ( 5010)+( 5010)+ ( 5010 10) =6000 unit
Q = ( 5020)+( 5020) + ( 5020 20) =22000 unit
So Q > L,K
Page
7
So EQ > 1
Question (3)
3- The owner of a car wash is trying to decide on the number of
people to employ based on the following short production
function:
Q = 6 L 0.5 L
Where Q = No. of car washes per hour
L = No. of workers
a- Generate a schedule showing TP,AP,MP., then graph it.
TPL
MPL
APL
0
1
2
3
4
5
6
7
8
9
10
11
0
5.5
10
13.5
16
17.5
18
17.5
16
13.5
10
5.5
0
5.5
4.5
3.5
2.5
1.5
0.5
-0.5
-1.5
-2.5
-3.5
-4.5
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
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8
b- Suppose the price for a basic car wash (no under coating ,no wax
treatments etc.) in his area of business is LE 5. How many people should
he hire if he pays each worker LE 6 / he.?
L
TP
0
1
2
3
4
5
6
7
8
9
10
11
12
0
5.5
10
13.5
16
17.5
18
17.5
16
13.5
10
5.5
0
MP
5.5
4.5
3.5
2.5
1.5
0.5
-0.5
-1.5
-2.5
-3.5
-4.5
-5.5
AP
TRP
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
0
27.5
50
67.5
80
87.5
90
87.5
80
67.5
50
27.5
0
MRP
TLC MLC
TRPTLC
MRP-MLC
27.5
22.5
17.5
12.5
7.5
2.5
-2.5
-7.5
-12.5
-17.5
-22.5
-27.5
0
6
12
18
24
30
36
42
48
54
60
66
72
0
21.5
38
49.5
56
57.5
54
45.5
32
13.5
-10
-38.5
-72
0
21.5
16.5
11.5
6.5
1.5
-3.5
-8.5
-13.5
-18.5
-23.5
-28.5
-33.5
6
6
6
6
6
6
6
6
6
6
6
6
If the price of labor equals 6LE / h , the firm should hire5 workers to reach
its maximum profitability of 57,5LE .
Beyond that point the firm would pay more in additional labor cost than it
would receive in additional revenue.
C- Suppose he consider hiring students on a part time basis for LE 4 \ hr. .
Do you think he should hire more students at this lower rate ? Explain.
L
0
1
2
3
TP
0
5.5
10
13.5
MP
AP
5.5
4.5
3.5
5.5
5
4.5
TRP
0
27.5
50
67.5
MRP
27.5
22.5
17.5
Page
9
TLC
0
4
8
12
MLC
4
4
4
TRP-TLC
0
23.5
42
55.5
MRP-MLC
0
23.5
18.5
13.5
4
5
6
7
8
9
10
11
12
16
17.5
18
17.5
16
13.5
10
5.5
0
2.5
1.5
0.5
-0.5
-1.5
-2.5
-3.5
-4.5
-5.5
4
3.5
3
2.5
2
1.5
1
0.5
0
80
87.5
90
87.5
80
67.5
50
27.5
0
12.5
7.5
2.5
-2.5
-7.5
-12.5
-17.5
-22.5
-27.5
16
20
24
28
32
36
40
44
48
4
4
4
4
4
4
4
4
4
64
67.5
66
59.5
48
31.5
10
-16.5
-48
8.5
3.5
-1.5
-6.5
-11.5
-16.5
-21.5
-26.5
-31.5
If the price of labor equals 4 LE / h , the firm should also hire 5 workers to
reach its maximum profitability.
Beyond that point the firm would pay more in additional labor cost than it
would receive in additional revenue.
But if the pay per worker is 4 LE rather than 6LE the firm maximum profit
will be 67.5LE inside of 57.5LE and this is due to the saving in labor cost.
Page
10

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Managerial Economics

Dr. Fakhry Eldin Elfiky

Mahmoud Mohamed Raafat

b- Calculate the values for labor over which stages I , II , III

Starts from the origin that means L = 0

APL = (50 L +6 L 0.5L )

Begins from the point of end of stage 1 when L = 6

Ends when MPL = 0

MPL = 50 + 12L - 1.5L = 0

Begins from the point of end of stage 2 when L = 11

C- Assume each worker is paid LE 10 per hour and works a 40 hour

When the price = 7.5

The short run impact on the firms production

The production decreased by 43.5 units as because the number of worker

The long run impact on the firms production

0.15 + 0.40 + 0.45 = 1

0.70 + 0.60 = 1.30

(IRTS ) increasing return to scale

a- Generate a schedule showing TP,AP,MP., then graph it.

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