1. You are an employer seeking to fill a vacant position on an assembly line. Are you more concerned with the average product of labor or the marginal product of labor for the last person hired? If you observe that your average product is just beginning to decline, should you hire any more workers? What does this situation imply about the marginal product of your last worker hired? Discuss the three stages of production function with an example. Which stage will be preferred by you as rational firm? Why?
2. Forey, Inc., competes against many other firms in a industry. Over the last decade, several firms have entered this industry and, as consequences, Forey is earning a return on investment that roughly equals the interest rates. Furthermore, the four-firm concentration ratio and Herfindahl Hirschman index are both quite small. Based on this information, which market structure best characterizes the industry in which Forey competes? Explain the characteristics this market structure and what happens to the Forey Inc’s profit in the short-run and long-run.
3. A political campaign manager must decide whether to emphasize television advertisements or letters to potential voters in a re-election campaign. Describe the production function for campaign votes. How might information about this function (such as the shape of the isoquants) help the campaign manager to plan strategy?
4. A certain town in Kerala obtains all of its electricity from one company, South Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens, it makes economic sense to charge a monopoly price for electricity. Do you agree with the CEO? Why or Why not? If the gains of the producers from monopoly power could be redistributed to consumer, would the social cost of monopoly power be eliminated? What are the important measures you suggest to control monopoly power?