MBAA 523Problem Set 41. Define the short-run and long-run and provide an aviation example.2. In the short-run, Airbus ma...

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MBAA 523 - Define the short-run and long-run

April 14, 2018

MBAA 523
Problem Set 4
1. Define the short-run and long-run and provide an aviation example.
2. In the short-run, Airbus manufactures aircraft at its existing factories; however, labor and
other inputs such as those components purchased from suppliers (engines are one
example) are variable. Airbus has received a substantial number of new orders and will
increase its monthly aircraft production rate. Explain why the MPL will decrease above
some level of labor as more workers are added. How does this decrease in MPL result in
an increase in MC?
3. The table shows the marginal product of labor for a manufacturing firm in the short-run.
The cost of an additional worker is $100 per day including benefits. The product sells for
$2 per unit. Compute the value of the marginal product of labor. How many workers will
the firm hire?
Labor
(L)
0
1
2
3
4
5
6
7
8
9
10
11

MPL

VMPL

74
168
238
284
306
304
278
228
154
56
-66

4. NEW DELHI -- Each fall at harvest time, Leela Dhar Rajput used to hire 25 farm hands
to work from dawn to dusk every day for a week bringing in the rice crop on his 20 acres
of land in the central Indian state of Madhya Pradesh. This year, he plans to use a
combine harvester instead. With the machine and the help of two or three men, he
expects to finish the job in a single day. Indian agriculture is belatedly engaged in a
mechanical revolution, boosting productivity in a sector that has long relied on cheap,
surplus labor to tend crops in the world's second most populous country. Job
opportunities in factories and services, plus the government's rural job-creation program
guaranteeing 100 days of employment a year on public-works projects, have drained the
pool of workers in villages. "I just can't find enough people to do the hard work in the
fields anymore," says Mr. Rajput. [Mukherji, B. (2013, October 29). India's Farmers
Mechanize. WSJ, B8.]
Show and label the amount of capital (K) and labor (L) employed with the displayed
isocost line and then insert a new isocost reflecting a substantial increase in the price of

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labor. Mr. Rajput intends to harvest the same quantity of rice as last year. Show and
explain the effect on the K and L employed.

K

L
5. Complete the table (the easiest method is to do the computation in MS Excel). Create a
line graph of AFC, AVC, ATC, and MC (in Excel, select the 4 columns, then Insert/Line,
and choose the first graph option). Explain the reason for the shape of each curve. The
completed table and graph can be copied and pasted into this document. Hint: Be
certain that your line graph looks similar to those in Baye (your graph will not be as
smooth as in Baye). If not, there is likely an error in your computations.
Q
0
100
200
300
400
500
600

FC
$10,000

VC

TC

AFC

AVC

ATC

MC

$200
125
133.34
150
200
250

6. Define economies of scale. Is there evidence of economies of scale in the airline
industry? (Hint: Consider Low-Cost-Carriers). In large commercial aircraft
manufacturing?










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