YOUR NAME:

____________________

YOUR GRADER:_____________YOUR SECTION CODE: ____________YOUR PRECEPTOR:

______________

ECON 100-F2014
REINHARDT
HOMEWORK ASSIGNMENT NO. 6

COSTS, PERFECT COMPETITION AND MONOPOLY

Due in the precepts of the week starting on Monday November 10, 2014.

QUESTION 1

(Mankiw) The following data represent the long-run total costs of production for
three firms, each producing a different commodity. Which of these firms
experiences economies of scale or diseconomies of scale? What factors drive
economies or diseconomies of scale of scale.

QUANTITY FIRM A FIRM B FIRM C

10,000 $600,000 $110,000 $210,000
20,000 $700,000 $240,000 $340,000
30,000 $800,000 $390,000 $490,000
40,000 $900,000 $560,000 $660,000
50,000 $1,000,000 $750,000 $850,000
60,000 $1,100,000 $960,000 $1,060,000
70,000 $1,200,000 $1,190,000 $1,290,000
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QUESTION 2

(Mankiw) A profit-maximizing firm selling its output in a perfectly competitive

product markets currenctly sells 100 units of its output per year. At that volume
the firm’s average revenue is $10. Average total costs are $8. Fixed costs per year
are $ 200. Calculate

a. Marginal costs $ _______________

b. Average variable costs: $ ____________

c. Profits: $ _________________

d. Does this firm’s output rate Q occur at the lowest point of its average total cost
curve?

Yes No. Explain

Addtitional calculations:
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QUESTION 3

Suppose a firm produces gadgets. The markets for productive inputs it faces and the technology it
uses are such that, if that technology is efficiently used, the firm’s cost function is

[1] TC = FC + cQ + dQ2 + eQ3 ,

where TC denotes Total costs per period and Q denotes the volume of gadgets produced per period,
FC denotes fixed costs per period, and c, d and e are numerical constants (parameters).

By taking the first derivative of TC with respect to Q we obtain the marginal cost function:

[2] MC = c + 2dQ +3eQ 2 .

Let us assume here that FC = $1,100, c = 132.8, d = -11, and e = 0.4.

Suppose initially the firm were one of a myriad suppliers of gadgets and faced a perfectly
competitive market for that product. It can sell whatever volume Q per period it produces at the
market price of P = $200 per gadgets.

a. What volume of output will this profit-maximizing firm produce? 1 Q = _____________units

1
You will remember from high-school days that if a∙Q 2 + b∙Q + c = 0, then

Q = [-b + SQRT(b2-4ac)]/2a or Q = [-b - SQRT(b2-4ac)]/2a

where SQRT means “square root.” Here, of course, negative values of Q would not make sense.
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b. Calculate the profit (or loss) the firm will book at the profit-maximizing (loss
minimizing) output rate Q you have calculated above.

Profit (Loss) = $ ________________

Your calculations.

c. Calculate the metric (P – AVC) at the output rate you have calculated. Invent a
suitable name for it.

P – AVQ = $ _____________/unit

SUITABLE NAME:

Your calculations.
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QUESTION 4

Suppose a medical device firm has a patent on a new device. The cost function for this device is

[1] C = $1,000,000 + $20Q

The firm’s sales possibility curve for the device in the U.S. market is P = $500 – 0.0012Q and in the
Canadian market P = $300 – 0.0014Q.

Arbitrage among purchasers of this device is illegal.

a. At what prices will this profit-maximizing firm sell the device in the U.S. and in the Canadian
market, nd what quantities will be sold?.

US price: $ __________/unit. Units sold in the U.S. : _______________/units

Canadian price: $ __________/unit. Units sold in Canada: __________/units

Show your calculations below.

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b. Calcuate the total profits the device manufacturer would earn per period,
assuming that Canada and the U.S. are the only countries in which the device is
sold.

Profits = $______________/year.

QUESTION 5

Consider a corporation that is a monopolist in the sale of some product. Assume initially that
corporate profits are not taxed. With capacity fixed, the firm has selected what it considers its profit-
maximizing price-output combination. Call this the baseline case. Assume next that Congress passes
a law imposing a profit tax of 35% on corporate profits.

a. In the short run, how will this firm respond to that law, that is, what happens to the price-
output combination it will now choose, relative to the baseline case? Explain as best you can.

b. How might your answer change for the long-run. (Not in text. Just think about it).