NAME = AMNA LALL

I.D = 10721

QUESTION # 03
Consider total cost and total revenue given in the following table:

Quantity 0 1 2 3 4 5 6 7
Total Cost 8 9 10 11 13 19 27 37
Total Revenue 0 8 16 24 32 40 48 56

a. Calculate profit for each quantity. How much should the firm produce to maximize
profit?
b. Calculate marginal revenue and marginal cost for each quantity. Graph them. (Hint:
Put the
points at 2 1/2.) At what quantity do these curves cross? How does this relate to your
answer to part (a)?
c. Can you tell whether this firm is in a competitive industry? If so, can you tell whether
the industry
is in a long-run equilibrium?

SOL:

Quantity Total Total Cost Marginal Marginal Profit=

Revenue Revenue Cost MR-MC
0 0 8
1 8 9 8 1 7
2 16 10 8 1 7
3 24 11 8 1 7
4 32 13 8 2 6
5 40 19 8 6 2
6 48 27 8 8 0
7 56 37 8 10 -2
Profit maximizing point at 6 because there MC equals MR.

c) the firm is in a competitive industry because price stays the same

(horizontal) at any quantity produced
--> not in a long run equilibrium because price(8€) exceeds average total cost
(4,50€)

QUESTION # 04
Ball Bearing Inc. faces costs of production as follows.

Quantity 0 1 2 3 4 5 6
Total fixed cost $100 100 100 100 100 100 100
Total variable cost $0 50 70 90 140 200 360

SOL:

Qty Total Total Total Marginal Average Average Average

Fixed Variable Costs Costs Fixed Variable Total Costs
Costs Costs ($)= ($)= Costs Costs ($)=
($) F.C (Δ TC/ ΔQ) ($)= F.C/ ($)= V.C/ TF.C+TV.C/
+V.C   Qty Qty Qty
0 $100 $0 100 0 0 0
1 100 50 150 50 100 50 150
2 100 70 170 20 100 35 85
3 100 90 190 20 33 30 63
4 100 140 240 50 25 35 60
5 100 200 300 60 20 40 60
 6 100 360 460 160 17 60 77

b)  For the first ball bearings, the profit in this case is a loss of $100 (Revenue - Total
costs; $150 - 50).

c) At this level of production, the firm's profit, is a loss of $100.  This is the best
decision the firm can make: False.

QUESTION # 05
Suppose the book-printing industry is competitive and begins in a long-run equilibrium.
a. Draw a diagram showing the average total cost, marginal cost, marginal revenue, and
supply
curve of the typical firm in the industry.
b. Hi-Tech Printing Company invents a new process that sharply reduces the cost of
printing books.
What happens to Hi-Tech's profits and to the price of books in the short run when Hi-
Tech's
patent prevents other firms from using the new technology?
c. What happens in the long run when the patent expires and other firms are free to use
the
technology?

SOL:

In graph one LRAC =Long run average cost

SRAC = short run average cost

MC= Marginal cost

Marginal revenue is equals to price and in long run equilibrium. Price is lowest point on
long run average cost curve.
The supply curve of a firm is portion of marginal cost curve.
b. The decrease in cost shifts marginal cost and average curve since there is perfect competition
in market, the market supply curve would remain unchanged. As a result, market price remains
unchanged. Thus, the profits of Hi-Tech printing Company increase.

c. When patent expires, there would be npo entry barrier. It would operate efficient level and
new firms would keep on entertaining till price falls to average at cost at efficient scale of
operation. The equilibrium firms make zero profit.