Problem Set # 2

This problem set is due Thursday, March 28, at the beginning of the class period. Problem sets done on notebook paper or unstapled will not be accepted. Late problem sets are unacceptable also.

1. The following table gives information regarding the effectiveness of Pepsi advertising on TV and Radio. Pepsi has the choice of advertising in English-language media or in Spanish-language media. The following table gives the sales increases (in dollars) produced by advertising in each media outlet for a given number of minutes.

a) Derive a table in which you show the marginal sales obtained by a one minute increase in advertising in each media outlet.

b) You are told that a one minute commercial costs: $18,000 on English TV networks, $8,000 on English radio stations, $4,000 on Spanish TV networks, and $1,000 on Spanish radio stations. If your purpose is to maximize sales, and you have a budget of $122,000 for advertising, how many minutes would you buy in each of the four media outlets?

c) The English-language TV networks decide to increase the price of a one minute commercial to $30,000. If the other media outlets do not change the price of their commercials and your budget for advertising is now $158,000, how many minutes would you buy in each of the four media outlets?

2. Suppose that the Nagoya plant of the Sony Corporation has the following cost structure for the production of 50" TV: (1)its fixed costs are $1,000 per hour; (2)its variable costs are shown below.

a) Derive the FC, TC, MC, AVC and ATC schedules.

b) Graph the AVC, ATC, and MC curves.

c) How much would this firm produce if it was in a perfectly competitive market and price was $300? Explain.

d) How much would this firm produce if price was $1,200?

e) How much would this firm produce if price was $2,400?

f) Graph the supply curve.

3. Adam, a baker of apple pies, gives you the following information. To make one pie, Adam uses one hour of labor and one pound of apples. He bakes the pies in an oven that he leases for $100 per day. The hourly wage that Adam pays is $5, and each pound of apples costs $2. Assume that Adam has only one oven available, and that he can bake a maximum of 50 apple pies in one day.

a) How much are Adam's fixed costs? Variable costs? Total costs? (Express these as a function of Q, the number of apple pies.)

b) Determine and graph average variable costs, average fixed costs, average total costs, and marginal costs (You should compute these costs for Q= 0, 10, 20, 30, 40, and 50).

c) Suppose that the market for apple pies is perfectly competitive and that the market price of apple pies is $8 each. How many apple pies should Adam produce per day in the short run? How much would his profits or losses be?

d) How much is the minimum price necessary for Adam to operate in the short run?

4. When I was in Mexico last week a friend of mine came to me with an investment idea. She wants to start a travel agency that will arrange "Spring Break" trips for American students to Mexican seaside resorts. She wants us to run the travel agency for 5 years and then sell it to someone else. After working together on the project, we came up with the following financial information about the initial investment and expected profits for the five years of the travel agency operation:

Revenue from sale of travel agency (in fifth year): 1,000,000 pesos

Interest rate: 25 % per year

a) Should we go ahead and invest our money in this venture? Why or why not?

b) What would you advise if the interest rate was 15% per year instead of 25%? Why?