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# EC1000 – Question Sheet 3 – Week 8

1. Three managers of a beer producing company are discussing a possible increase in production. Each suggests a way to make this decision. H: We should examine whether our company’s productivity (gallons of beer per worker) would rise or fall. R: We should examine whether our average cost would rise or fall. T: We should examine whether the extra revenue from selling the additional beer would be greater or smaller than the extra costs. Whose opinion would you support? 2. The Clean Springs Water Company has a monopoly on bottled water sales in California. If the price of tap water increases, what is the change in Clean Springs' profit-maximizing levels of output, price, and profit? Explain in words and with a graph. 3. Jimmy Jazz and the Repercussions (a band from Tadcaster) have just finished recording their first CD. Their record company's marketing department determines that the demand for the CD is as follows:
Number of CD’s

Price

£24 22 20 18 16 14

10,000 20,000 30,000 40,000 50,000 60,000

The company can produce the CD with no fixed cost and a variable cost of £5 per CD. a. Find total revenue for quantity equal to 10,000, 20,000, and so on. What is the marginal revenue for each 10,000 increase in the quantity sold? b. What quantity of CDs would maximize profit? What would the price be? What would the profit be? c. If the band had an agent, and if you were the band's agent, what recording fee would you advise them to demand from the record company? Why? 4. Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drunks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single diagram of the saloon’s demand curve and its cost curves, show the price and quantity combinations favoured by each of the three partners. Explain. 5. Paul is the manager of Alpha Company, a firm that has a monopoly in the market for bicycle breaks thanks to a patented innovative technology. The owner of the firm, David, hires a consulting company to estimate the price elasticity of bicycle brakes. The consultants find that a 10% increase in the price would decrease demand by 5%. As a result, David decides to fire Paul and hire a new manager. Why? If you were Paul, what could you argue to convince David not to fire you?