Labor-intensive and a capital-intensive method of production

Part-1

Q1. What are the two primary factors that influence a firm manager’s choice between a labor-intensive and a capital-intensive method of production? How does each factor influence the manager’s choice.

Q2. Historically, empirical evidence showed that it was more cost effective to have a single generator of electricity serve a particular region’s electricity needs than to have several smaller units compete against each other. More recently, technological advances have occurred in the generation of electricity that allow much smaller generating units to produce electricity for the same average cost as much larger units. Explain how this change would affect the firm’s long-run average cost curve and the minimum efficient scale.

Part-2

Q1. Suppose a perfectly competitive firm is initially in long-run equilibrium. In the short run, what will happen in each of the following cases to average and marginal costs, and to economic profits? Carefully, explain your answer in each case using a graph.

a. The firm experiences an increase in the wages it must pay its employees.
b. The firm acquired an improved production technology.

Q2. Assess the following statement regarding the agricultural industry: “Although farming has become increasingly concentrated over the last 70 years, it is still a highly competitive industry”. Explain why you agree or disagree.

Q3. Assume a perfectly competitive firm is currently producing 5,000 units of output and is earning $15,000 in total revenue. The marginal cost of the 5,000th unit of output is $3. The corresponding average total cost is $3.50 and total fixed costs equal $1250. Based on this information, should this firm continue to operate in the short run? Why or why not?

Q4. Assume the market for a good produced by perfectly competitive firms is currently in equilibrium (economic profit = 0). Now assume there is a decrease in market demand for the good. Analyze the short-run effects of the decrease in demand on equilibrium market price and output. What has happened to the profits of each of the firms in the industry? Over time, what will happen to the number of firms in the industry? Why?

Part-3

Q1. Assume the market shares of the six largest firms in an industry are 12 percent each. Calculate the six-firm concentration ratio and Herfindahl-Hirschman index for this industry. What does each of these measures have to say about the degree of concentration in the industry? Explain.

Q2. Assume good X is produced in a monopolistically competitive market. In addition, each of the firms in the industry uses essentially the same technology. Competitors distinguish their individual products primarily through persuasive advertising. Assume that one of the firms in the market discovers a new production process that substantially reduces the average costs of production. Analyze the effects of this discovery on long-run equilibrium in the market. Use a graph to show your answer.

Part-4

Q1. Assume a cartel that consists of two firms has determined its profit-maximizing level of output and must now decide how to allocate total output between the two firms. Assuming firm A’s marginal costs are less than firm B’s marginal costs, should firm A produce a smaller share of total output than firm B? Explain.

Q2. In oligopolistic markets, price competition strategies are usually destructive. The text’s discussion of the airline industry, the soft drink industry, and the doughnut industry reveals a common theme when it comes to the types of competitive practices firms in each industry engage in to avoid price competition. Explain how they compete for market share and what advantage does this type of competition offer firms? Provide another example from the UAE or any other economy explain how the firms you chose compete for market share.

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