NAME: ___________________________________________
CHAPTER TWELVE PROBLEMS
1. Sally is considering opening her own beauty salon. She anticipates the following annual costs
Furniture:
Equipment:
Rent:
Coloring products:
Styling products:
a.
b.
c.
d.
e.
$20,000
$14,000
$12,000
$6,000
$4,000
Additionally, Sally is withdrawing $34,000 from her
savings account that pays 4% interest/year to purchase the
furniture and equipment; she will quit her current job that
pays $25,000 per year. She expects total revenues from
the new business in the first year to be $70,000. Calculate
the following:
Explicit costs (list the items).
Implicit costs (list the items).
Accounting profit.
Economic profit.
Given this first-year information only, should Sally open a salon?
2. State whether the following decision is a short-run or long-run decision:
a. ADM is deciding whether to install machinery that uses Human Machine Interface
technology or 8-layer PCB prototype technology in its manufacturing plant.
b. Wal-Mart hires additional seasonal workers during November and December.
c. Bassett furniture manufacturers close all manufacturing plants in North Carolina, USA
and outsource their furniture production to manufacturing plants in China.
d. General Motors purchases new equipment to replace depreciating equipment.
3. If marginal productivity is below average productivity, what is happening to average variable
costs? Why?
4. Use the table below to answer the following questions:
Labor
Per day
1
2
3
4
5
6
7
8
Number of shoes
produced per day
5
12
21
29
35
39
39
35
a. What is the marginal product of the third worker?
b. At what level of labor per day does diminishing marginal
productivity set in?
c. In what range (of labor per day) will this firm operate?
5. Use the table below to answer the following questions:
Output
0
1
2
3
4
5
6
Total Cost
$10
$20
$28
$38
$53
$73
$99
a.
b.
c.
d.
e.
f.
What are variable costs of producing 5 units?
What is average total cost of producing 3 units?
What is average fixed cost of producing 4 units?
What is the marginal cost of producing the 2nd unit?
What are fixed costs?
What is average variable cost of producing 1 unit?
6. State whether the following describes MC (marginal cost), ATC (average total cost), AVC
(average variable cost), or AFC (average fixed cost). Some statements may describe more
than one cost curve.
a. Costs continuously decline as output rises.
b. Always lies above the AVC curve.
c. First declines as quantity increases, but then increases as quantity increases.
d. Cuts the ATC and AVC at their minimum points.
CHAPTER THIRTEEN PROBLEMS
1. State whether these firms are experiencing economies of scale or diseconomies of scale.
a. West Company can produce 1,500 units at an average total cost of $2.50 or 1,800 units at
an average total cost of $2.25.
b. North Company can produce 500,000 units at a total cost of $220,000 or 600,000 units at
a total cost of $280,000.
c. Iams can produce 10,000 bags of dog food at a total cost of $150,000. If they increase
their production by 7%, total costs will rise by 3%.
6. Use the following data to draw a long-run average total cost curve. Label the range of
diseconomies of scale, constant returns to scale, and economies of scale.
Quantity
5
10
15
20
25
30
35
40
45
LRATC
$11
$8
$7
$6
$6
$6
$7
$10
$12
a. What is this firm’s minimum efficient level of production?
b. What can you conclude about the short run cost of producing 25 units of output?
CHAPTER FOURTEEN PROBLEMS
1. Suppose your study partner constructed a list of the following conditions of a perfectly
competitive market. Circle those that he got correct and fix those that he got wrong.
There are many barriers to entry.
Firms’ products are differentiated.
Firms maximize market share.
Firms are price makers.
There is complete information.
The number of firms is large.
2. Given the marginal cost information below, answer the following questions:
a. The firm can sell a helmet for $34 and the
Output
Marginal costs
firm is producing 6 helmets. Would
1
15
increasing output increase or decrease profit?
2
12
3
20
b. The firm can sell a helmet for $34 and the
4
27
firm is producing 4 helmets. Would
5
34
increasing output increase or decrease profit?
6
40
7
47
c. The firm can sell a helmet for $34. What is the profit-maximizing level of output?
3. Why is the marginal revenue for a firm in perfect competition equal to the market price?
4. Briefly explain why the following statements are either TRUE or FALSE:
a. Perfectly competitive firms can never earn economic profit.
b. Perfectly competitive firms seek to maximize both per-unit and total profit.
c. Sometimes, profit-maximization is the same as loss-minimization.
d. Long-run market supply curves are always upward-sloping.
5. The following graph shows cost curves for a perfectly competitive firm in a constant-cost
industry.
a. Give the actual names of curves A, B, and C.
A:
B:
C:
b. If the market price falls below ________ this firm will be suffering economic losses.
c. If the market price falls below ______ this firm will choose to shut down in the short run.
d. If the market price were $8, this firm would be earning approximately ________ in
economic profit.
e. In the long run, this firm will produce ________ units of output.
CHAPTER FIFTEEN PROBLEMS
1. Briefly explain why the following statements are TRUE or FALSE:
a.
b.
c.
d.
e.
f.
A monopolist produces the quantity at which MC = MR.
A monopolist sets a price equal to MR.
A monopolist faces a downward sloping MR curve.
A monopolist faces a perfectly elastic demand curve.
A monopolist must lower price if it produces additional units.
A monopolist is always able to price discriminate.
3. Why are barriers to entry essential for a monopoly to exist?
5. Use the following table that shows the demand curve facing a monopolist along with its total
cost information. Complete the table by calculating total revenue and profit.
Quantity
0
1
2
3
4
5
6
Price
$145
$125
$115
$103
$93.50
$85
$77.50
Total Cost
Total Revenue
Profit
$20
$115
$200
$275
$340
$395
$440
a. What is the profit maximizing level of output?
b. What price will the monopolist set?
CHAPTER SIXTEEN PROBLEMS
1. State whether the following characteristics represent monopolistic competition, oligopoly, or
both.
a.
b.
c.
d.
e.
f.
Many sellers
Mutually interdependent decisions
Multiple dimensions to competition
Differentiated products
Few sellers
Easy long-run entry and exit
2. Six firms in the pet grooming industry in a city have the following market shares:
Firm
A
B
C
D
E
F
Market Share
40
25
15
10
7
3
a. What is the four-firm concentration in this industry?
b. What is the Herfindahl index for the pet grooming industry?
c. What would be the four-firm concentration ratio if Firms B
and C decided to merge?
d. What would be the Herfindahl index if Firms B and C decided to merge?
3. Refer to the graph below that represents a monopolistically competitive firm to answer the
following questions.
a. What is the profit-maximizing level of
output? What price will it charge?
b. Is this monopolistically competitive firm
in long-run equilibrium? Why or why not?
4. Consider the DVD rental market.
a. Do you think Blockbuster and Hollywood video consider the pricing of their competitor
Netflix when setting their prices? Why or why not?
b. What is the likely market structure of the video rental market?
c. Would you expect price to be high (close to the monopoly price) or low (close to the
perfectly competitive price)? Why do you think this?
5. State whether the following characteristics describe the cartel or the contestable market
model of oligopoly.
a.
b.
c.
d.
e.
Firms act as if they were one firm.
Barriers to entry and exit, and not market structure, determine price.
Members assign output quotas.
Production decisions ensure joint profit-maximization.
A competitive price could result.