Homework 4 Nov
Chapter 13
1.
4.
a. opportunity cost; b. average total cost; c. fixed cost; d. variable cost; e. total cost; f.
marginal cost
Here is the table of costs:
Workers
Output
Marginal
Product
Total
Cost
Average
Total Cost
Marginal
Cost
0
0
---
$200
---
---
1
20
20
300
$15.00
$5.00
2
50
30
400
8.00
3.33
3
90
40
500
5.56
2.50
4
120
30
600
5.00
3.33
5
140
20
700
5.00
5.00
6
150
10
800
5.33
10.00
7
155
5
900
5.81
20.00
a. See the table for marginal product. Marginal product rises at first, then declines because
of diminishing marginal product.
b. See the table for total cost.
c.
See the table for average total cost. Average total cost is U-shaped. When quantity is
low, average total cost declines as quantity rises; when quantity is high, average total
cost rises as quantity rises.
d. See the table for marginal cost. Marginal cost is also U-shaped, but rises steeply as
output increases. This is due to diminishing marginal product.
e. When marginal product is rising, marginal cost is falling, and vice versa.
f.
When marginal cost is less than average total cost, average total cost is falling; the cost
of the last unit produced pulls the average down. When marginal cost is greater than
average total cost, average total cost is rising; the cost of the last unit produced pushes
the average up.
Chapter 14
10. a. Figure 7 illustrates the situation in the U.S. textile industry. With no international trade,
the market is in long-run equilibrium. Supply intersects demand at quantity Q1 and price
$30, with a typical firm producing output q1.
Figure 7
b. The effect of imports at $25 is that the market supply curve follows the old supply curve
up to a price of $25, then becomes horizontal at that price. As a result, demand exceeds
domestic supply, so the country imports textiles from other countries. The typical
domestic firm now reduces its output from q 1 to q2, incurring losses, because the large
fixed costs imply that average total cost will be much higher than the price.
c.
In the long run, domestic firms will be unable to compete with foreign firms because
their costs are too high. All the domestic firms will exit the industry and other countries
will supply enough to satisfy the entire domestic demand.
Chapter 15
8. a. Long-distance phone service was originally a natural monopoly because the installation of
phone lines across the country meant that one firm's costs were much lower than if two
or more firms did the same thing.
b. With communications satellites, the cost is no different if one firm supplies long-distance
calls or if many firms do so. So the industry evolved from a natural monopoly to a
competitive market.
c.
It is efficient to have competition in long-distance phone service and regulated
monopolies in local phone service because local phone service remains a natural
monopoly (being based on landlines) while long-distance service is a competitive market
(being based on satellites).
9. a. A monopolist always produces a quantity at which demand is elastic. If the firm produced
a quantity for which demand was inelastic, then if the firm raised its price, quantity
would fall by a smaller percentage than the rise in price, so revenue would increase.
Because costs would decrease at a lower quantity, the firm would have higher revenue
and lower costs, so profit would be higher. Thus the firm should keep raising its price
until profits are maximized, which must happen on an elastic portion of the demand
curve.
SEE FIGURE 4 ON PAGE 97. SLOPE OF LINEAR DEMAND CURVE IS CONSTANT, BUT
ELASTICITY IS NOT.
b. As Figure 9 shows, another way to see this is to note that on an inelastic portion of the
demand curve, marginal revenue is negative. Increasing quantity requires a greater
percentage reduction in price, so revenue declines. Because a firm maximizes profit
where marginal cost equals marginal revenue, and marginal cost is never negative, the
profit-maximizing quantity can never occur where marginal revenue is negative. Thus, it
can never be on the inelastic portion of the demand curve.
Figure 9
c.
Total revenue is maximized where marginal revenue is equal to zero.
Chapter 16
11. a. Figure 9 shows the market demand.
Figure 9
b. See Figure 9 for the marginal revenue curve. Marginal revenue is equal to 2 – 2Q /N.
c.
Marginal revenue is equal to zero where 2 – 2Q /N = 0, or Q = N. This will occur at a
price of P = 2 – Q /N or 2 – 1 = 1.
d. Profit will be equal to total revenue, which is N × 1 = N. Total surplus will be equal to
1.5N.
e. N would have to be at least 3 million for the firm to make a profit of zero. Because the
fixed cost does not affect marginal cost, the socially efficient level of output is also
unaffected. It will be where P = MC or 2N.
f.
The fixed costs will prevent the socially optimal output from occurring. Even if N is
greater than 3 million, firms will only produce an output level of N to maximize profits.
Chapter 17
5. a. Synergy does not have a dominant strategy. If Synergy believes that Dynaco will go with
a large budget, it will also choose a large budget. However, if Synergy believes that
Dynaco will go with a small budget, it will want a small budget as well.
b. Yes, Dynaco has a dominant strategy of going with a large budget. It is the best
strategy for Dynaco to follow no matter what Synergy chooses.
c.
The Nash equilibrium is that both firms will choose a large budget. Dynaco will follow its
dominant strategy so Synergy will choose a large budget as well.