Expert Work

Expert Work

1)         Based on your knowledge of the definition of the various measures of short-run cost, complete this table.

Q
TC
TFC
TVC
AC
AFC
AVC
MC
0
120
[A]
[B]
-
-
-
-
1
[C]
[D]
[E]
265
[F]
[G]
[H]
 

2)         Consider the following cost equation: Total Cost (TC) = 160Q -10Q2 + 1.2Q3.  What is Total Cost when the Quantity is 20?

3)         Which of the following represents the equation for the Average Cost (AC)?

AC = 160 – 10Q + 1.2Q2

AC = 160Q – 10Q + 1.2Q

AC = 80Q – 5Q2 + 0.6Q3

AC = 53.3Q – 3.3Q2 + 0.4Q3

4)         What is the Marginal Cost of producing the 21st unit? (Hint: Begin by calculating TC at 20 and at 21.) Round your answer to the nearest whole number.

5)         Questions 5 through 7 refer to the following graphical representation of a short-run situation faced by a perfectly competitive firm. 

Is this a good market for this firm to be in?

Yes the firm should be here in the short run but in the long run it should leave.

Yes the firm should be here in the short run and it should also stay in the long run.

No; the firm should exit immediately.

6)         Refer to question 5. Which of the following describes the firm’s situation in the short run?

The firm is breaking even

There is a short run loss

There is a short run profit

The short run profit/loss situation cannot be determined from this graph

7)         Refer to question 5. What do you expect to happen in the long run?

New firms will enter; short-run profits will disappear

New firms will enter; short-run losses will disappear

Some existing firms will leave; short-run profits will disappear

Some existing firms will leave; short-run losses will disappear

8)         Questions 8 through 12 refer to the following scenario: The Automotive Supply Company has a small plant that produces speedometers exclusively. Its annual fixed costs are $30,000, and its variable costs are $10/unit. It can sell a speedometer for $25. How many speedometers must the company sell to break even?

9)         Refer to Question 8. What is the break-even revenue?

10)       Refer to Question 8. The company sold 3,000 units last year. What was its profit?

11)       Refer to Question 8. Next year’s fixed costs are expected to rise to $37,500. What will be the break-even quantity?

12)       If the company will sell the number of units obtained in the previous question (number 11) and wants to maintain the same profit as last year, what will its new price need to be? Round your answer to the nearest whole number.

Questions 1 through 5 refer to the following scenario. Suppose three firms face the same total market demand for their product. This demand is:

Price (P)
Quantity (Q)
$80
20,000
70
25,000
60
30,000
50
35,000
Suppose further that all three firms are selling their product for $60 and each has about one-third of the total market.

What is the amount of total revenue each firm receives, in dollars?

Now assume that one of the firms, in an attempt to gain market share at the expense of the others, drops its price to $50. The other two quickly follow suit. What is the amount of total revenue each firm now receives, in dollars, rounded to the nearest dollar?

What impact has the price drop had on the revenue of each firm?

Each firm has less revenue.

Each firm has more revenue.

The price-dropper has more revenue and the others have less.

The price-dropper has less revenue and the others have more.

If the firms had all raised their prices to $70 instead of lowering price, what would be the amount of total revenue each firm would have received, in dollars, rounded to the nearest dollar?

Would the firms have been better off raising the price to $70, lowering to $50, or making no change? 

Questions 6 through 10 refer to the scenario that follows. A monopolistically competitive firm has the following short-run inverse demand, marginal revenue, and cost schedules for a particular product:

P = $45 – $0.2Q

MR = $45 – $0.4Q

TC = $500 + $5Q

MC = $5 

What quantity would maximize profits for this firm? (Hint: Recall that profit maximizing is where MR = MC)

At what price should this firm sell its product?

What would be the amount of the firm’s total revenue at the quantity and price identified in the prior two questions?

What would be the amount of the firm’s profit (positive number) or loss (negative number) at the quantity and price identified in questions 6 and 7?

What do you think would happen in this market in the long run?

Questions 11 through 13 refer to the scenario that follows. An amusement park, whose customer set is made up of two markets, adult and children, has developed demand schedules as follows:

Calculate the price, quantity, and profit if the amusement park charges the same price in the two markets combined. (Hint: Add adult and child quantities together, and treat this total and the entire market quantity at each price.)
 

Is profit higher, lower, or the same when the market is split with different prices for adults and for children?

Questions 14 through 18 refer to the information that follows. Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sunday or whether it will close on that day. Monthly payoffs for each strategy pair are as shown in the table below.

What is White’s dominant strategy?

Open Sundays

Closed Sundays

There is no dominant strategy

What is Gray’s dominant strategy?

Open Sundays

Closed Sundays

There is no dominant strategy

What will be the likely equilibrium outcome, assuming no additional information is available to either firm?

Both open Sundays

Both closed Sundays

**White open Sundays, Gray closed Sundays

White closed Sundays, Gray closed Sundays

Is the position identified in question 17 the best possible outcome for both firms?

 
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