Answers and Questions for Economics Interview

Question 1
The total costs (TC) function for a company is: TC = 28,000 + 95Q 0.025Q2; given that Q = 10.
Calculate the following:
(i) TFC = TC - TVC
TFC = 28,000
(ii) TVC = TC - TFC
95Q 0.02Q2
95(10) 0.025(102)
950 2.5
TVC =947.5
(iii) AFC = TFC/Q
28,000/10
AFC = 2,800
(iv) AVC = TVC/Q
947.5/10
AVC = 94.75
(v) AC = TC/Q or AVC + AFC
TC = TFC + TVC
28,000 + 947.5
28,947.5/Q
AC = 2894.74
(vi) MC
95 0.05Q

Question 2
The cost function of a manufacturing firm that is producing television sets is estimated
as: TC = 250 + 150Q 2.5Q2 + 0.5Q3
(i) Derive the MC and AC functions
MC = 150 5Q + 1.5Q2
AC = TC/Q
(250/Q) + (150Q/Q) (2.5Q2/Q) + ( 0.5Q3/Q
250Q-1 + 150 2.5Q + 0.5Q2
(ii) What are the total costs and average cost at an output of 123 units?
TC = TVC + TFC
250 + 150Q 2.5Q2 + 0.5Q3
250 + 150(123) 2.5(1232) + 0.5(1233)
250 + 18450 - 37822.5 + 930433.5
TC = 911,311
AC = TC/Q
911311/123
AC = 7409

(iii) What is the value when AC is at a minimum?

AC is at a minimum when the first derivative of AC = 0
250Q-1 150 2.5Q + 0.5Q2
250Q-2 -2.5 + 1Q = 0 (INCOMPLETE)

(iv) What is the value when MC is at a minimum?

MC is at a minimum when the first derivative of MC = 0
MC = 150 5Q + 1.5Q2
-5 + 3Q = 0
Q = 5/3 = 1.66
150 5(1.66) + 1.5(1.662)
150 8.3 + 4.13
145.83

Question 3
Explain how each of the following events will affect the average and marginal cost
curves of a firm
AC = AVC + AFC
MC is the first derivative of AVC or the marginal cost of AVC
a) a decrease in labour rate; Labour costs are variable costs so Both AC and MC will decrease.
b) an increase in rent for a facility; rent is considered a fix cost so this will increase AC with no
effect on MC

c) stricter environmental regulation requiring installation of scrubbers on smokestacks; installation

of scrubbers on smokestacks will increase AC in terms of it fix cost nature again with no effect an
MC as far as it has no effect on variable cost.
d) a decrease in cost of utilities; this will decrease both AC and MC as far as it contributes to both
the fixed and Variable cost
e) a decrease in learning on the part of labour: this will increase AC in relation to its variable
properties as well as MC

Question 4
Call Us demand function is Q = 20 0.2P and the MC = 10 + 5Q.
Given that TFC = $2,000;
a) Derive an equation for the TC.
The total variable cost is the anti derivative of the marginal cost curve, which is
TC = 2,000+ 10Q + 2.5Q2
b) Calculate the profit at the profit maximizing level.
profit maximizing level MR = MC
Q = 20 0.2P
P = 100 - 5Q
TR = PQ
TR = 100(Q) 5Q(Q)
MR = 100 -10Q
MR = MC
100 -10Q = 10 + 5Q
100 10 = 10Q + 5Q
90 = 15Q
Q = 90/15
Q=6
P = 100 5(6)
100 30
P = 70
1/3
Profit = TR TC
TR = PQ
70 * 6 = 420
TC = 2,000+ 10Q + 2.5Q2
2000 + 10(6) + 2.5(62)
TC = 2150
TR TC
420 2150 = -1730
The company is actually making a loss of 1730.

Question 5
A lawyer is contemplating quitting her current job with a major corporation (annual salary
EC$600,000) to open her own law firm. She estimates that the total of operating the office is
approximately EC$250,000 per year. The potential revenue is estimated as EC$800,000 per year.
Calculate the following:
a) Total accounting profit; and
Profit = revenue implicit cost
800,000 250,000 = 550,000.
b) Total economic profit)
Profit = revenue explicit and implicit cost
800,000 250,000 600,000 = -50,000.
c) What should she do?
She should continue working at her current job earning her 600,000 annual salary.

Question 6
The production manager of a clothing manufacturer estimates that the total annual cost
of producing suits is given by the equation TC = 5,000 + 4,100Q 8Q2 + 0.004Q3.
a) If the market price is constant, what is the shutdown level of output?
Shutdown when P < AVC,
AVC = TVC/Q
P = MC = AVC
4100 16Q + 0.012Q2 = 4100 8Q + 0.004Q2
0.008Q2 8Q =
Q(0.008Q - 8) = 0
Q = 0, Q = 1000
Shut down if Q < 1000
b) What is the minimum price the firm can accept?
P = MC = AVC
P = MC
4100 16(1000) + 0.012(10002)
P = 12000+ 4100 16000
P = 100

Question 7
The economics department of Western Drilling, a producer of natural gas, has
estimated the long-run total cost function for natural gas distribution to be
TC = 200Q 0.004Q3, where Q is millions of cubic feet (MMCF) of natural gas.
a) Determine an equation for the long-run AC of distributing natural gas. (2 marks)
b) Is the production process characterized by decreasing, returns to scale? (3 marks)
c) At present, Western produces but not distributes natural gas. Interstate Pipeline is the only
distributor of natural gas in the region and it carries about 100 MMCF per day. Management at
Western estimates the regional market will grow from 100 to 150 MMCF per day and thinks it
might be able to capture about 50% of the increase in the size of the market. Interstate has the
capacity to deliver 200 MMCF per day. Will Western be able to compete against Interstate in the
distribution of gas (assume Interstate has the same TC function)? (5 marks)

Question 8
CCM television Station is considering selling promotional videos. It can have the
videos produced by either Liguanea Company (Firm A) or Grants Pen Cooperative
(Firm B). Firm A will charge the station a set-up fee of $1,200 plus $2.00 for each
cassette, while Firm B has no set-up fee and will charge $4.00
for each cassette. The station estimates its demand for cassettes to be:
Q = 1,600 200P; where P is the price ($) and Q is the number of cassettes
a) Suppose the station decides to give away the cassettes, how many cassettes should
it order and from which supplier? The firm should order 1600 cassettes as, 1600 represent the
market demand for cassettes, (the intercept represent the max demand) when the price is at 0 or
free in other words. Cassettes should be ordered frim firm A because.

Firm A = 1200 +2Q

1200 + 2(1600)
1200 + 3200 = 4400
Firm B = 4Q
4 = 4(1600) = 6400

b) Suppose the station wants to maximize its profit, what price should it charge and
how many cassettes should it order from each supplier?

Firm A:
P = 1600/200 Q/200
P = 8 0.005Q
TR = PQ
8Q 0.005Q(Q)
MR = 8 0.01Q
Profit max when MR = MC
8 0.01Q = 2
0.01Q = 8 2
Q = 600
Firm B:
MR = MC
8 0.01Q = 4

0.01Q = 8 4
Q = 400
P = 8 0.005(1000)
P=3

Question 9
On Time Store produces digital watches on a single production line serviced on one daily shift.
Maximum capacity is 120,000 watches per month, which requires 60,000 hours of labour per
month. Total fixed costs are $600,000, the labour rate per hour = $8 and other variable costs per
watch = $6. The marketing analyst estimates the demand equation to be Q = 560,000 20,000 P.
a) How many additional watches can be produced by an extra hour of labour?
Q/LH
120,000/60,000 = 2
b) What is the marginal cost of an additional watch?
TC = 600,000 + (8/2)L + 6Q
MC = 4 + 6 = 10
c) What price should the firm set to maximise profit?
MR = MC
P = 560,000/20,000 Q/20,000
P = 28 0.00005Q
TR = PQ
28(Q) 0.00005Q(Q)
MR =28 - 0.0001Q
28 0.0001Q = 10
0.0001Q = 28 10
Q = 180,000
P = 28 0.00005(180,000)
P = 19
d) The firm can increase capacity up to 100% by scheduling a night shift. The labour
rate at night = $12 per hour. What is the marginal cost of an additional watch on
the night shift?
MC = 12/2 + 6 = 12