Q.

1 Capital Labour Total Product

K L TP
10 0 0
10 1 5
10 2 15
10 3 30
10 4 50
10 5 75
10 6 85
10 7 90
10 8 92
10 9 92
10 10 90

When TP=75 and L=5 average output =15 which is the maximum of ov
Average total cost is minimized at labor of 7 and TP=90. Average varia

Q.2) Explicit Costs :

1 Wages for workers, Insurance, electricity, lease on the building.
There is no implicit cost listed
2 Fixed cost: lease on building, Wages for worker, insurance
Variable cost: Electricity, inventory

Q.3)
a) economic profit measures include both the explicit and the implicit costs of pro
If Marcus made zero economic profit, his accounting profit was likely to be positi

b) Higher implicit costs would lead to lower economic profit. On the other hand, th

Q.4
K L Tp TFC
20 0 0 200
20 1 5 200
20 2 15 200
20 3 30 200
 20 4 50 200
20 5 75 200
20 6 85 200
20 7 90 200
20 8 92 200

45

40

35

30

25

20

15

10

0
1 2 3 4

Q.5) Each worker produces = to the other workers means

Q.6) An increase in the price of the variable input results in the AVC (avera
ATC (average total cost) and MC (marginal cost) moving up together.
The curves retain their shape and relative orientation.
An increase in the price of the fixed input results in only the ATC mov
The curves retain their shapes and MC continues to intersect the new

Q.7)
ATC=TC/Q=(VC+FC)/Q=(w*L+FC)/Q
ATC=(80*50+500)/Q=4500/Q
To find Q, we must use the fact that APL=Q/L and we know that APL=
ATC=4500/2500=1.8

MC = ( 80/75) = 1.065

AVC= TVC/Q, Q=2500, TVC =80*50= 4000, 4000/2500=1.6

ATC is increasing
MC is inreasing 1
AVC is decreasing 1

Q.8 The cost-minimizing choice depends on the ratio of the marginal prod
in the two countries, it is probable, all other things held constant, that
a and that in Mexico it will use relatively more labor and less capital.

b In case factors of production cannot be substituted, the input mix wil

expensive, but highly productive, the firm will use a lot oflabor in the

Q.9) The average total cost curve is U-shaped because of the combined infl
increase in output and AVC decreases. As long as the failing effect of A
continuous to decline and when firms produce the optimum output, S
Refernce are in balance. At stage III, AFC will fall slowly due to the production w
variable factors. The failing effect of AFC is lower than the rising effect

There are a lots of little short-run ATC curves along the length

Referene

Answer The company must focus on its labou

Q.10) 1 2 3
50 80 111
AC 50 40 37

Ans At 4,5,6 is econimises scale because per unit cost is minimum here

Major factors causing economies of scale are: Specialization: Firms p

specialization by splitting jobs into smaller tasks. These individual task
they know best and it also allows them to perfect their skills. Overall r
b management level.
Efficient Capital: The most efficient machines and equipment are base
production can afford such equipment and benefit from their full capa
Firms having small scale production either cannot afford such equipm

Negotiation Power: Larger firms are in powerful position to negotiate

government. When purchasing raw material, larger firms can obtain b
eager to work at large companies even at low wages (not below minim
interest rate to well-established firms having large scale production.
 Average Product Marginal Product Chart Title
AP MP
0 TP AP MP
5 5 92 92
90
7.5 10 85
10 15 75
12.5 20
15 25 50
14.2 10
12.9 5 30
25
11.5 2 20
15 15 12.5 15 14.1666666667
12.8571428571
11.5 10
10.2 0 10
7.5 10 10
5 5 2
9 -2 0 0
0 1 2 3 4 5 6 7 8 9

=15 which is the maximum of overall averageproduct output.

r of 7 and TP=90. Average variable cost isminimized at a labor=5 and TP=75

ity, lease on the building.

r worker, insurance

cit and the implicit costs of production.

ting profit was likely to be positive and equal to the implicit costs.

mic profit. On the other hand, there would beno change in Marcus’s accounting profit.

TVC` TC AFC AVC ATC MC

0 200 0 0 0
10 210 40 2 42 2
20 220 13.3 1.33 14.67 1
30 230 6.7 1 7.67 0.667
 250

200

40 240 4 0.8 4.8 0.500 150

50 250 2.7 0.67 3.33 0.400
60 260 2.4 0.71 3.06 1 100
70 270 2.2 0.78 3 2
80 280 2.17 0.87 3.04 5 50

45 0
40 1 2 3 4

35

30

25 AFC
AVC
20 ATC
15 MC

10

0
1 2 3 4 5 6 7 8 9

For Firm 1 For Firm 2

workers means Labour Production Labour Production
1 3 7 18
2 6 8 15
3 9 9 12
4 12 10 9
5 15 11 6
6 18

e input results in the AVC (average variable cost),

inal cost) moving up together.
tive orientation.
put results in only the ATC moving up.
continues to intersect the new ATC at its minimum.

3920 4420 2450

1.800

PL=Q/L and we know that APL=50 and L=50. Plugging in,this gives us 50=Q/50 which means Q=2500.

000, 4000/2500=1.6
 n the ratio of the marginal productivity of the input relative to the cost of the input in each country. Because input costs are very differ
other things held constant, that in the United States the firm will choose an input mix consisting of a lot of capital and relatively little la
more labor and less capital.

e substituted, the input mix will have to be identical. If input productivities vary between countries, the input choice may be Same i.e,
firm will use a lot oflabor in the United States as well)

ed because of the combined influences of the average fixed cost (AFC) and the average variable cost (AVC). At stage I, AFC beginsto fall
As long as the failing effect of AFC is higher than the rising effect of AVC, the short run average total cost (SATC) tends to decrease. At s
produce the optimum output, SATC will reach it minimum. AC remains constant at this stage since the failing effect of AFC and the risin
slowly due to the production with a negative marginal product for the variable input. AVC increases quickly due to diminishing returns
FC is lower than the rising effect of AVC. Therefore, SATC begins to increase

run ATC curves along the length of the long-run curve, when De econoies of scale occurs its means that the company has expandd too

ompany must focus on its labour, working hour and must increase its production and suspend its expanison decision

4 5 6 7 8 9
140 170 216 273 336 468
35 34 36 39 42 52

er unit cost is minimum here

ale are: Specialization: Firms producing at a large scale employ a large number of workers. This allows the firms to practice
aller tasks. These individual tasks are assigned to separate workers. In this way workers spend all their work time on the part
m to perfect their skills. Overall result of this is that an average unit is produced at lower cost. Specialization also works at
 chines and equipment are based on cutting edge technology and have high production capacity. Firms with large scale
and benefit from their full capacity. At full utilization such machinery or equipment achieves lower production cost per unit.
ther cannot afford such equipment or cannot utilize such machinery to its full capacity.

powerful position to negotiate better outcomes with parties such as suppliers, labor unions, financial institutions and
aterial, larger firms can obtain better trade discounts by bulk purchasing. They can negotiate lower wages because people are
n at low wages (not below minimum wage of course). Financial institutions such as banks are more willing to offer loans at lower
having large scale production.
50

00

TFC
50
TVC`
TC
00

50

0
1 2 3 4 5 6 7 8 9

Production

1.804082
se input costs are very different
capital and relatively little labor

put choice may be Same i.e, if U.S. labor is

At stage I, AFC beginsto fall with an

SATC) tends to decrease. At stage II, AFC
ng effect of AFC and the rising effect of AVC
y due to diminishing returns of the

e company has expandd too much

n decision

e firms to practice
time on the part
also works at
h large scale
tion cost per unit.

utions and
ecause people are
o offer loans at lower
 Assgnment 4

Q.1

Firm 1 is making losses since the average total cost is higher than mar
Firm 2 is making profit since all cost c
should not continue producing in the short run.

Q.2
a The firm will produce 205 units

b In a perfectly competitive market the demand curve is perfectly elasti

to produce it and your costs in doing so (you would stop producing at
quantity produced it will never cross the demand curve - therefore yo

c
By selling the items for $12.50 it costs you $5 for the material so 12.50
will produce until marginal cost crosses the demand curve. c) At that p
12.50 – (5+3) = $4.50

The
firm’s profit is *(12.50)(205)+ –
16,400 = 2,562.50-16,400 = -$13.837.50. The firm is losing money, bu
business in the short (as P>AVC)

Figure 7 shows the the typical firm in the industry, with average total
AT C1, marginal cost MC1 and price P1.
Q.4)

p
 MC

30

25

q2 q1
Firm

The new process reduces Hi-Tech’s marginal cost to MC2 na

total cost to AT C2, but the price remains at P1 since other
b the new process. Thus Hi-Tech earns positive profits.

When the patent expires and other firms are free to use th
firms’ average total cost curves decline to AT C2, so the ma
c P3 and firms earn no profits

Q.5 $10= average revenue and 50 units sold

Q.6) Profit is equal to (P–ATC) × Q. Price is equal to AR. Therefore, profit is

b
firms in perfect competition, marginal revenue and average revenue
marginal revenue is equal to marginal cost, marginal cost must be $10

c
Average fixed cost is equal to AFC /Qwhich is $200/100 = $2. Since av
average fixed cost, AVC = $8 − $2 = $6

d Since average total cost is less than marginal cost, average total cost m
at an output level less than 100

Q.7)
Q VC FC
1 1 16
2 4 16
3 9 16
4 16 16
5 25 16
6 36 16

b At price $10, each firm will produce five units, so there will be 5 100 =

c
At a price of $10 and a quantity supplied of five, each firm is earning a
Thus, entry will occur and the price will fall. As price falls, quantity dem
 At a price of $10 and a quantity supplied of five, each firm is earning a
Thus, entry will occur and the price will fall. As price falls, quantity dem

d P MC

Q.8)
Suppose that TC=100+15Q, where TC is the total cost and Q is the qua
produce any output in the short run? In the short run, the firm will sh
any output is AVC. Since TC = 100 + 15Q, we know that FC = 100 and V

b
Suppose that MC=4Q, where MC is the marginal cost. The perfectly co
price does it sell these units? To maximize profit in a perfectly competi

Q.10) Q P R
0 120 0
1 105 105
2 90 180
3 75 225
4 60 240
5 45 225
6 30 180
1155

Q.11) A firm in a monopolistically competitive market chooses its shortrun p

In the short run, if firms in a monopolistically competitive market earn

competitors exit the market, the demand for bikes from any given bik
entry is easy, the typical monopolistically competitive firm earns zero
 Total revenue = (price)*(quantity demanded)
Total cost = (cost per unit)*(quantity demanded) + fixed costs
Profit = Total revenue - Total Cost
Q.12)
price quantity Revenue
$100 0 0
90 100,000 9000000
80 200,000 16000000
70 300,000 21000000
60 400,000 24000000
50 500,000 25000000
40 600,000 24000000
30 700,000 21000000
20 800,000 16000000
10 900,000 9000000
0 1,000,000 0

a profit-maximizer publisher should sell either 400,000 or

500,000 books, at a price of either $60 or $50 respectively.
the quantities and prices that maximize the profits, at $18,
Other quantities result in a smaller profit.

b price quantity Revenue Margi

100 0 0
90 100,000 9000000 (900
80 200,000 16000000 (16
70 300,000 21000000 (21-
60 400,000 24000000
50 500,000 25000000
40 600,000 24000000
30 700,000 21000000
20 800,000 16000000
10 900,000 9000000
0 1,000,000 0

As you can see, as price decreases, marginal revenue decre

explanation to this can be found in the link I provided abov
idea is that as price decreases, even though the publisher's
increase (because more people buy the book), he must also
other books at a lower price than before, thus obtaining a l
revenue.
 Marginal costs are obtained in a similar fashion as margina
revenues. In this case, since the cost per book, this is easy:
marginal cost is $10. That is, producing an additional book
to the total cost. Notice that the marginal cost is completel
independent of the 2,000,000 of fixed costs of the publishe
c

d The publisher is selling

his books at $50. However, producing them costs only $10.
"society" (reflected in the demand curve) would be willing
books if the price were lower. Moreover, it would be sociall
efficient to produce more books; because the society value
more than the cost of producing them. For example, the de
600,000 books is $40, therefore, it would be more socially e
to produce this quantity, because the society values each b
while the cost of producing each is $10.

the quantity that maximizes profits is still 500,000, no matt

maximizing economic efficiency would lead the publisher t

quantity so that the demand price equals the MC. This hap
900,00 books (demand price: $10). However, at this price a
(although it is economically efficient) the publisher suffers
losses. Check the table in question 1: at 900,000 books, the
f looses $2,000,000.

Q.13

B Quantity declines from QC to QM and price rises to PM. Co

is areas B + C + D + E. Consumers transfer the amount of ar

Q.14
a
The table below shows total revenue and marginal revenue
marginal revenue equals zero, since marginal cost equals ze
price equals marginal cost equals zero. The profit maximisin

P Q TR
8 0 0
7 1 7
 6 2 12
5 3 15
4 4 16
3 5 15
2 6 12
1 7 7
0 8 0

b
The company should not build the bridge because its profit
$400,000.

If the government were to build the bridge, it should set pr

people to use the bridge.

d
Yes, the government should build the bridge, because it wo
cost of building the bridge.

Q.15 a) The profit-maximizing outcome is the same as maximizing t

consumer is shown in the following tables

P Qty Adult Ticket

10 100
9 200
8 300
7 300
6 300
5 300
4 300
3 300
2 300
1 300
0 300

Firm should charge adults $7 and sell 300 tickets

total cost is $2,000, profit will be $900

b If price discrimination were not allowed, you would want to

c The children who were willing to pay $4 but will not see the
surplus is lower. There is no one that is better off

d In (a) total profit would be $400. In (b), there would be a $

Q.16) The firm’s profit is maximized at the output where margina

10Q 900 = 30Q Q = 30 The monopoly price is P = 1,000 –

b Social welfare is maximized where price is equal to margina

c Calculate the deadweight loss from monopoly.   The dea

d 1 A flat fee of 2000 Ectenian dollars would not alter the pro
profits would not alter the profit-maximizing price or quanti
Ectenian dollars if the director was paid that amount for ev
would be 25, the marginal cost at that level would be 500,
function, the quantity at which social welfare is maximized
Q = 37.5 As a result, the deadweight loss would
ge total cost is higher than marginal revenue. However, the firm can continue producing in the short run since it will achieve profits in t
is making profit since all cost curves are below the marginal cost curve. The firm should continue producing in the short run. Firm is m
hort run.

emand curve is perfectly elastic - in other words demand and price stay the same for the product regardless of how much you sell - the
o (you would stop producing at the point it ceased to be profitable – that is when the marginal cost crosses the demand curve - but as t
e demand curve - therefore you produce until you reach the plant’s capacity).

you $5 for the material so 12.50 - 5 = 7.50 7.50 less one hour staff cost of 7.50 - 3 = $4.50 Here, since the firm is making some profit, it w
s the demand curve. c) At that price, what is the firm’s profit or loss? Will the firm continue to produce in the short run? Carefully expla

50. The firm is losing money, but if it were to shut down , it would lose $15,000 (its fixed costs); Thus, the loss-minimizing choice is to st

he industry, with average total cost

P
S
ATC
 D

Q Q
Industry

-Tech’s marginal cost to MC2 nad its average

rice remains at P1 since other firms cannot use
ch earns positive profits.

d other firms are free to use the technology, all

ves decline to AT C2, so the market price falls to

equal to AR. Therefore, profit is ($10 –$8) × 100 = $200.

revenue and average revenue are equal. Since profit maximization also implies that
cost, marginal cost must be $10.

hich is $200/100 = $2. Since average variable cost is equal to average total cost minus

rginal cost, average total cost must be rising. Therefore, the efficient scale must occur

TC MC ATC VC=( AVC*Q)

17 1 17
20 3 10
25 5 8.33
32 7 8
41 9 8.2
52 11 8.67

e units, so there will be 5 100 = 500 units supplied in the market

ed of five, each firm is earning a positive profit because price is greater than average total cost.
l fall. As price falls, quantity demanded will rise and the quantity supplied by each firm will fall
 AC

s the total cost and Q is the quantity produced. What is the minimum price necessary for this firm to
n the short run, the firm will shut down if P < AVC, so the minimum price necessary for this firm to produce
Q, we know that FC = 100 and VC = 15Q, so AVC = 15Q/Q = 15

marginal cost. The perfectly competitive firm maximizes profits by producing 10 units of output. At what
ize profit in a perfectly competitive market, P = MC So P = 4*10 = $40

MR
0
105
75
45
15
-15
-45

e market chooses its shortrun production quantity by setting marginal revenue equal to marginal cost,

tically competitive market earnnegativeprofit, there aremorefirms in the market than there would be inlongrun equilibrium. As
nd for bikes from any given bike shop will increase, so that each bike shop sellsmore bikes at any given price. Because market
ly competitive firm earns zero economic profit in the longrun
nded)
demanded) + fixed costs

quantity Revenue Cost Profit

0 0 2000000 -2000000
100,000 9000000 3000000 6000000
200,000 16000000 4000000 12000000
300,000 21000000 5000000 16000000
400,000 24000000 6000000 18000000
500,000 25000000 7000000 18000000
600,000 24000000 8000000 16000000
700,000 21000000 9000000 12000000
800,000 16000000 10000000 6000000
900,000 9000000 11000000 -2000000
1,000,000 0 12000000 -12000000

should sell either 400,000 or

either $60 or $50 respectively. These are
at maximize the profits, at $18,000,000.
maller profit.

y Revenue Marginal Revenue

0 ---
9000000 (9000000-0)/(100000-0)=90
16000000 (16 - 9)/(200-100)=70
21000000 (21-16)/(300-200)=50
24000000 30
25000000 10
24000000 -10
21000000 -30
16000000 -50
9000000 -70
00 0 -90

reases, marginal revenue decreases. An

und in the link I provided above: the
es, even though the publisher's sales
ple buy the book), he must also sell all the
than before, thus obtaining a lower
 in a similar fashion as marginal
the cost per book, this is easy: the
producing an additional book adds $10
the marginal cost is completely
00 of fixed costs of the publisher

producing them costs only $10. The

emand curve) would be willing to buy more
r. Moreover, it would be socially
ooks; because the society values the books
cing them. For example, the demand price at
ore, it would be more socially efficient
cause the society values each book at $40,
each is $10.

profits is still 500,000, no matter what the publisher pays the author. This is related to the definition of "sunk costs"

ncy would lead the publisher to set the

d price equals the MC. This happens at
e: $10). However, at this price and quantity
efficient) the publisher suffers severe
estion 1: at 900,000 books, the publisher

o QM and price rises to PM. Consumer surplus falls by areas D + E + F to areas B + C. Producer surplus becomes areas D + E, and total su
mers transfer the amount of areas D + E to producers and the deadweight loss is area F

revenue and marginal revenue for the bridge. The profit maximising price would be where revenue is maximised, which will occur whe
o, since marginal cost equals zero. This occurs at a price of $4 and quantity of 400. The efficient level of output is 800, since that's wher
quals zero. The profit maximising quantity is lower than the efficient quantity because the firm is a monopolist

MR

7
 5
3
1
-1
-3
-5
-7

ld the bridge because its profits are negative. The most revenue it can earn is $1,600,000 and the cost is $2,000,000 so it would lose

uild the bridge, it should set price equal to marginal cost to be efficient. But marginal cost is zero, so the government should not charge

build the bridge, because it would increase society's total surplus, total surplus has area 1/2*8*800,000=$3,200,000, which exceeds th

me is the same as maximizing total revenue in this case because there are no variable costs. The total revenue from selling to each type
llowing tables

TR ( Adult ) P Qty ( Child) TR ( Child)

1000 10 0 0
1800 9 0 0
2400 8 0 0
2100 7 0 0
1800 6 0 0
1500 5 100 500
1200 4 200 800
900 3 200 600
600 2 200 400
300 1 200 200
0 0 200 0

e adults $7 and sell 300 tickets. You should charge children $4 and sell 200 tickets. Total revenue will be $2,100 + $800 = $2,900. Becau
0, profit will be $900

not allowed, you would want to set a price of $7 for the tickets. You would sell 300 tickets and profit would be $100
ng to pay $4 but will not see the show now that the price is $7 will be worse off. The producer is worse off because profit is lower. Total
one that is better off

$400. In (b), there would be a $400 loss. There would be no change in (c).

d at the output where marginal revenue is equal to marginal cost. Therefore, setting the two equations equal, we get: 1,000 – 20Q = 1
e monopoly price is P = 1,000 – 10Q = 700

where price is equal to marginal cost:  1,000 – 10Q = 100 + 10Q 900 = 20Q Q = 45 At an output level of 45, the price would be 550

ss from monopoly.   The deadweight loss would be equal to (0.5)(15)(300) = 2,250

dollars would not alter the profit- maximizing price or quantity. The deadweight loss would be unaffected. (b) fee of 50 percent of the
rofit-maximizing price or quantity. The deadweight loss would be unaffected. 3. The marginal cost of production would rise b
or was paid that amount for every unit sold. The new marginal cost would be 100 + 10Q + 150. The new profit-maximizing outpu
ost at that level would be 500, and the price would rise to 750. The deadweight loss would be smaller. With the new margina
ich social welfare is maximized changes. Now, price is equal to marginal cost when Q = 37.5: 1,000 - 10Q = 250 + 10Q 750 =
ult, the deadweight loss would be equal to (0.5)(37.5-25)(750-500) = 1,562.50 Ectenian dollars rather than 2,250
 e it will achieve profits in the long run.
in the short run. Firm is making losses and

of how much you sell - therefore the amount you sell is determined by your ability
he demand curve - but as the question does not specify a change in costs with

m is making some profit, it will produce until it reaches the capacity of the plant. It
short run? Carefully explain your answer. At a price of $12.50, the firm’s profit is

s-minimizing choice is to stay in

Q
run equilibrium. As
Because market
 k costs"

mes areas D + E, and total surplus

mised, which will occur where

ut is 800, since that's where
st
000,000 so it would lose

ernment should not charge

200,000, which exceeds the

ue from selling to each type of

100 + $800 = $2,900. Because

cause profit is lower. Total

l, we get: 1,000 – 20Q = 100 +

, the price would be 550

b) fee of 50 percent of the

of production would rise by 150
w profit-maximizing output
ller. With the new marginal cost
00 - 10Q = 250 + 10Q 750 = 20Q
n 2,250