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1. _____/4 4.

2. _____/15 5._____/10 Name: _________________________
3. _____/10 6._____/5 Graded by: _________________________
Total: _____/50

Unit III: Costs of Production, Perfect Competition, and Imperfect Competition

Problem Set #3

1. Explain an example that demonstrates the real world application of each of the following. Define the
terms in your own words and use examples that clearly demonstrate your understanding of each concept.
a. Explicit and Implicit Costs (____/1)
b. The Law of Diminishing Marginal Returns (____/1)
c. Fixed Costs, Variable Costs, and Total Cost (____/1)
d. Economies of Scale and Diseconomies of Scale (____/1)

2. Below is information regarding Corys Surfboard Inc. Complete the table and do the following (____/5):
a. On a large graph, plot the MC, AFC, AVC, and ATC curves from this data (____/4)
b. EXPLAIN what would happen to each of Corys per unit cost curves if the price of Styrofoam
blanks (a variable input) increases. How would the cost curves change if there were an increase in
his rent (a fixed input)? Explain why the results are different. (____/2)
c. If the market for surfboards was perfectly competitive and the market price was $150, how many
surfboards should Cory make and how much profit will he make for EACH surfboard? Draw the
firms demand on your graph in a. Explain how you got your answer. (____/4)
Total Variable Total Cost Average Fixed Average Variable Average Total Marginal
Product Costs (TVC) (TC) Cost (AFC) Cost (AVC) Cost (ATC) Cost (MC)
0 $0 $100
1 60
2 90
3 130
4 180
5 250
6 340
7 490
8 680

3. Complete the following practice FRQs (Both will be graded in class):

a. In-class Practice FRQ (____/5) b. Take Home FRQs (____/5)

4. Assume that apples are an inferior good. Draw a perfectly competitive market for apples and a firm selling
apples in the long run equilibrium where price is $10 and the firms equilibrium quantity is 50. Explain the
following situations graphically and in words (Draw and label side-by-side graphs for each).
a. EXPLAIN what happens in the short-run if incomes increases by 15%? ( ____/3)
b. EXPLAIN the process by which this market returns to the long-run equilibrium ( ____/3)
5. (_____/10 Points Total) Create a well-organized study guide that includes the essential concepts and
graphs for each of the four market structures. Points will be awarded according to the following criteria:

a. Structure
i. Well organized information that is easily accessible (____/1)
ii. Clear and well-drawn graphs (____/1)
b. Explanation of General Concepts: (____/3)
i. Profit Maximizing Rule
ii. Short-Run Supply Curve and Shut-down Point
iii. Productive Efficiency
iv. Allocative Efficiency
v. Excess Capacity
c. Inclusion of key graphs
i. Costs of Production (____/1)
1. Production Function TP, MP, and AP (Graph with three stages)
2. TC, VC, FC (Definitions)
3. MC, ATC, AVC, AFC (Formulas and Graph)
4. Long-Run ATC (Graph showing Economies and Diseconomies of Scale)
ii. Perfect Competition (____/1)
1. Characteristics
2. Firm and Industry in Short-Run Making Profit (Graph)
3. Firm and Industry in Short-Run Making Loss (Graph)
4. Firm and Industry in Long-Run equilibrium (Graph)
5. How economic profit and loss disappear in the Long-Run (Graph)
iii. Monopolies (____/1)
1. Characteristics
2. Demand and MR for imperfectly competitive firms (Elastic and Inelastic range)
3. Monopoly making a profit (Graph-label Profit, Consumers Surplus, and DWL)
4. Perfectly Price Discriminating Monopoly (Graph)
5. Regulated Monopolies (Fair Return and Socially Optimal)
iv. Monopolistic Competition (____/1)
1. Characteristics
2. Firm Making Short-Run Profit (Graph)
3. Firm Making Short-Run Loss (Graph)
4. Firm in Long-Run Equilibrium (Graph)
5. How economic profit and loss disappear in the Long-Run (Graph)
v. Oligopolies (____/1)
1. Characteristics
2. Game-Theory Model (Matrix)
3. Kinked Demand Curve (Graph)
4. Profit maximization with Collusion (Graph)
6. Use the chart to complete the following:
a. Explain why the MR curve less than the demand curve for all imperfectly competitive firms. Use a
SPECIFIC numerical example from the chart in your explanation. ( ____/3)
b. On a large graph, PLOT the demand and marginal revenue curves. On a new graph below, plot the
Total Revenue. Use the total revenue test to EXPLAIN the elastic and inelastic range of the
demand curve. Be sure to identify the elastic and inelastic ranges. (____/2)

Price Quantity Demanded Total Revenue Marginal Revenue

$11.00 0
10 1
9 2
8 3
7 4
6 5
5 6
4 7
3 8
2 9