Question

6. Smiling Cow Dairy can sell all the milk it wants for $4 a gallon, and it can rent all the robots it wants to milk the cows at a capital rental price of $100 a day. It faces the following production schedule: Total Product (Gallons) Number of Robots 0 0 50 85 115 140 150 155 4 a) In what kind of market structure does the firm rent robots? How can you tell?

Answer 1

Answer 6

(a)

The Market in which firm rent robots is the perfect competitive market.

Because He can rent quantity of robot at a fixed price of $100 and hence Price is constant and is independent with the quantity. This implies firm who are giving the robots on rent are price takers.  

In general any other market structure like Monopoly, monopolistic competition, etc demand is downward sloping or price depends on demand.

Hence, The Market in which firm rent robots is the perfect competitive market.

(b) In order to maximize profit a firm hires that amount of input(here robots) at which MPR = w/p

Marginal Productivity of Robot , w = cost of renting robot = 100 , p = Price of the good(here milk) = 4

Hence we have to find amount of robots for which MPR = w/P = 100/4 = 25

MPR(n) = TPR(n) - TPR(n - 1)

where TPR(n) means total product when n units of robots are hired

We can see from above table that TPR(4) - TPR(4 - 1) = TPR(4) - TPR(3)

= 140 - 115 = 25

Hence, MPR = w/P = 100/4 = 25 when 4 unit of Robot are hired.

Hence,Firm should rent 4 Robots.