Introduction to Economics
Tutorial Four
1. An allergy pill sells for £25 a box. Steve, Maria, and Brian are willing to pay £33, £27, and
£19, respectively, for a box of pills. What is the total consumer surplus?
2. Suppose John derives utility from consumption C and leisure l. He has the following
Cobb-Douglas utility function: U = (24-H)0.5(C)0.5, where w is the wage rate, H are the daily
hours of work, and C is total consumption.
i) What is John’s budget constraint?
ii) Set up the utility maximization problem.
iii) Derive John’s labor supply function.
3. Meg's Sticks Ltd. produces hockey sticks with a production function given by
q=2 √ KL . Assume capital K is fixed at 100 and labour L is variable, the rental rate of capital
is £1 and the wage rate of labour is £4.
i) Sketch the short-run production function, derive and sketch the average and marginal
product of labour functions, and state whether the marginal product of labour is increasing,
decreasing or constant.
ii) Calculate the firm's short-run total cost (SRTC), average cost (SRAC) and marginal cost
(SRMC).
iii) What are the SRTC, SRAC and SRMC for producing 25, 50, 100 and 200 sticks?
iv) Graph SRAC and SRMC using the points found in iii).
v) Where does the SRMC intersect the SRAC? Explain why this is so.
4. Suppose Meg’s Sticks Ltd. can choose the levels of K and L.
i) To produce 200 sticks at minimum cost how much labour and capital should be employed?
ii) In general, to produce q sticks at minimum cost how much labour and capital should be
employed?
iii) What is the minimum cost of producing q sticks?
iv) What are long-run marginal cost and long-run average cost?
Tutorial Four
1. An allergy pill sells for £25 a box. Steve, Maria, and Brian are willing to pay £33, £27, and
£19, respectively, for a box of pills. What is the total consumer surplus?
2. Suppose John derives utility from consumption C and leisure l. He has the following
Cobb-Douglas utility function: U = (24-H)0.5(C)0.5, where w is the wage rate, H are the daily
hours of work, and C is total consumption.
i) What is John’s budget constraint?
ii) Set up the utility maximization problem.
iii) Derive John’s labor supply function.
3. Meg's Sticks Ltd. produces hockey sticks with a production function given by
q=2 √ KL . Assume capital K is fixed at 100 and labour L is variable, the rental rate of capital
is £1 and the wage rate of labour is £4.
i) Sketch the short-run production function, derive and sketch the average and marginal
product of labour functions, and state whether the marginal product of labour is increasing,
decreasing or constant.
ii) Calculate the firm's short-run total cost (SRTC), average cost (SRAC) and marginal cost
(SRMC).
iii) What are the SRTC, SRAC and SRMC for producing 25, 50, 100 and 200 sticks?
iv) Graph SRAC and SRMC using the points found in iii).
v) Where does the SRMC intersect the SRAC? Explain why this is so.
4. Suppose Meg’s Sticks Ltd. can choose the levels of K and L.
i) To produce 200 sticks at minimum cost how much labour and capital should be employed?
ii) In general, to produce q sticks at minimum cost how much labour and capital should be
employed?
iii) What is the minimum cost of producing q sticks?
iv) What are long-run marginal cost and long-run average cost?
