Economics 310 Second Exam Spring 2004 Professor Kenneth Ng COBAE California State University, Northridge

Question 1 Question 1 (40 points)Consider the firm depicted on the next page which is producing 100,000 units of output domestically using 4,000 workers at a total cost of $100,000 at point A. 1.If the cost of labor in the U.S. is $20 per unit and the cost of capital is $100, how many units of capital is the firm using. Place you answer and your calculations in the box below and label all relevant values on your graph. $100,000=(4000*$20)=(X*$100) X=20,000/100=200 units of capital 2.Suppose the firm outsourced production to India where labor costs are only $5 per unit. Depict the short and long run effects of outsourcing on your graph. 3.What effect will outsourcing have on the capital/labor ratio? Will the number of jobs in the world, India and the U.S. combined increase of decrease? Depict on your graph and explain what is happening in the box below. 4.Compute the ATC after outsourcing or if it cannot be computed explain why. Put your computations or explanation in the box below. The ATC after outsourcing cannot be computed because the information necessary to compute the combination of capital and labor used is not available.

100,000 Labor Capital A 4, $100,000 5,000 20,000 After outsourcing the price of labor has fallen so the iso-cost and iso-output curves at (200,4,000) are no longer tangent so the firm is no longer producing efficiently. The firm is using too much capital and not enough labor. The firm can either cost minimize and move to point B where they are producing the same output with a lower total cost or output maximize by moving to C where they are producing more output with the same total cost. In either case, the capital/labor ratio will decrease C B

Question 2 Question 2 (60 points). Consider the firm which outsources from question (1). Draw their unit cost curves on the graphs before and after outsourcing on the next page assuming that the market clearing price is P1 before any outsourcing occurs. 1.Draw the unit cost curves for a second firm which refuses to outsource on the appropriate graph. 2.If the prevailing market price of the good is P1 depict the quantity produced by each firm and it’s profit or loss. 3.Use the market supply and demand curves below show the short and long run effects of outsourcing. What will happen to the number of firms, market output, firm output, short and long run profits, and the number of firms that outsource. 4.Carryover the effects from your market supply and demand curves onto the unit cost curves of the firms and show the effects of outsourcing on both firms profits and output decision. 5.Discuss the winners and losers from outsourcing in the box below.

Output Firm which outsources Firm which doesn’t outsource P1P1 MC ATC MC ATC MC ATC

S After long run entry/exit Price Q Demand S Ralphs, Albertson’s, and Vons P1P1 S After increasing wages P2P2 P3P3 The short and long term effects of outsourcing.

Curve Without HomeworkWith Homework Mean Standard Deviation Students Taking Exam74 GradeRequired Score Normalized Score Number Receiving Grade Percent Receiving Grade A % B % C % D % F 2432%

Administrative Details One Week Mandatory Cooling Off Period.  Nothing concerning the exam, homework, scoring etc. will be discussed until next Monday