Eco 201
Problem Set 11
Name_______________________________
15 November 2011
Cowen & Tabarrok, chapter 10
Cucumbers
0
100
200
300
400
500
600
Total Costs of Production
$0
$50
$110
$180
$260
$350
$450
1. Use the above table. Suppose that the market price per cucumber is $0.80.
a. What is the marginal revenue of producing 100 cucumbers?
The marginal revenue of producing 100 cucumbers is $80, or 100 × 0.80.
b. What happens to total cost if cucumber production rises from 500 to 600?
Total costs rise by the amount of marginal costs. The marginal cost of
increasing production from 500 to 600 cucumbers is given by the change in the
total cost: $450 minus $350, or $100.
c. What is the profit-maximizing quantity of cucumbers?
The profit-maximizing quantity occurs where marginal revenue equals marginal
cost. Marginal revenue is a constant $80 (for an additional 100 cucumbers)
and the marginal cost of increasing cucumber production from 300 to 400 is
$80. So the profit-maximizing quantity is 400 cucumbers.
2. The table below shows the TR and TC schedules for a competitive firm. Using your
knowledge of cost and profit structures, fill in all the missing blanks.
Q (Units)
0
1
2
3
4
5
6
7
8
TR ($)
0
80
160
240
320
400
480
560
640
TC ($)
30
50
80
120
170
230
300
380
470
MR
MC
AC
80
80
80
80
80
80
80
80
20
30
40
50
60
70
80
90
50
40
40
42.5
46
50
54.3
58.8
Profit
–30
30
80
120
150
170
180
180
170
Δ Profit
0
50
40
30
20
10
0
–10
Figure: Representative Firm
3. Refer to the figure above that shows a representative firm in a perfectly competitive
industry. Using the information provided in the figure answer the following questions.
a. What is the total profit or loss that this firm is making? Show all your calculations.
The firm is making a profit of $700 = ($5 × 700 – $4 × 700)
b. Will firms enter or exit the industry?
There will be entry of firms into the industry.
4. The following table presents the expected cost and revenue data for Marianne’s Brief Cases.
MBC produces and sells brief cases in a purely competitive market.
a. Fill in MBC's marginal revenue, marginal cost, average variable cost, average total cost, and
profit schedules.
Output
Total
Revenue
0
1
2
3
4
5
6
7
8
9
10
11
12
0
150
300
450
600
750
900
1050
1200
1350
1500
1650
1800
MR
Total
Cost
100
160
200
230
270
320
390
490
635
815
1015
1245
1495
AVC
60.00
50.00
43.33
42.50
44.00
48.33
55.71
66.88
79.44
91.50
104.09
116.25
ATC
160.00
100.00
76.67
67.50
64.00
65.00
70.00
79.38
90.56
101.50
113.18
124.58
MC
60.00
40.00
30.00
40.00
50.00
70.00
100.00
145.00
180.00
200.00
230.00
250.00
Profit
P=
150
-100
-10
100
220
330
430
510
560
565
535
485
405
305
Profit
P=
200
-100
40
200
370
530
680
810
910
965
985
985
955
905
Profit
P = 50
-100
-110
-100
-80
-70
-70
-90
-140
-235
-365
-515
-695
-895
b. If Marianne is a profit maximizer, how many brief cases should she produce when the
market price is $150.00. Indicate Marianne's profit.
Q = ______8________
Profit = _____$565_____
c. Indicate Marianne's output and profit if the market price of brief cases rises to $200.00.
Q = _______10______
Profit = ____$985______
d. How many brief cases will Marianne choose to sell if the market price falls to $50.00. Will
MBC continue to produce brief cases at this price? Explain.
Q = _______5_______
Profit = _____-$70_____
Marianne produces in the short run because it is better to lose $70 than $100 (her fixed costs).
Marianne's Briefcases
300.00
$ per case
250.00
200.00
150.00
100.00
50.00
0.00
1
2
3
4
5
6
7
8
9 10 11 12
Quantity of Briefcases
5. The following table presents the expected cost data for Phil the Florist. Phil raises flowers in a
greenhouse and sells them wholesale in a purely competitive market.
a. Fill in the firm's marginal cost, average variable cost, average total cost, and profit schedules.
Output
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
FC
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
VC
4.80
8.75
12.25
15.25
17.75
19.75
21.50
23.00
24.25
25.25
26.50
28.25
30.75
34.25
39.00
45.00
52.25
60.50
70.00
83.00
TC
29.80
33.75
37.25
40.25
42.75
44.75
46.50
48.00
49.25
50.25
51.50
53.25
55.75
59.25
64.00
70.00
77.25
85.50
95.00
108.00
AC
29.80
16.88
12.42
10.06
8.55
7.46
6.64
6.00
5.47
5.03
4.68
4.44
4.29
4.23
4.27
4.38
4.54
4.75
5.00
5.40
AVC
4.80
4.38
4.08
3.81
3.55
3.29
3.07
2.88
2.69
2.53
2.41
2.35
2.37
2.45
2.60
2.81
3.07
3.36
3.68
4.15
MC
Profit
Profit
3.95
3.50
3.00
2.50
2.00
1.75
1.50
1.25
1.00
1.25
1.75
2.50
3.50
4.75
6.00
7.25
8.25
9.50
13.00
-24.80
-23.75
-22.25
-20.25
-17.75
-14.75
-11.50
-8.00
-4.25
-0.25
3.50
6.75
9.25
10.75
11.00
10.00
7.75
4.50
0.00
-8.00
-26.80
-27.75
-28.25
-28.25
-27.75
-26.75
-25.50
-24.00
-22.25
-20.25
-18.50
-17.25
-16.75
-17.25
-19.00
-22.00
-26.25
-31.50
-38.00
-48.00
Phil's Flowers
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
3
5
7
9
11
13
15
17
19
b. If Phil is a profit maximizer, how many flowers should he produce when the market (wholesale)
price is $5.00 per dozen. Indicate Phil's profit.
Q = ______15_______
Profit = ____$11.00___
c. Indicate Phil's output and profit if the market price of flowers rises to $7.50 per dozen.
Q = ______17_______
Profit = _____$50.25___
d. How many flowers will Phil choose to sell if the wholesale price of flowers falls to $3.00 per
dozen. Will Phil continue to raise flowers at this price? Explain.
Q = _____13________
Profit = ____-$16.75___