Yeung Cheuk Tung 22659838 group B

Question 1(a)

Explicit cost: $25,000 + $30,000*3% = $25,900

Accounting profit: $60,000 - $25,900 = $34,100

Implicit cost: $40,000 + $20,000*3% = $40,600

Economic profit: $60,000 - $25,900 - $40,600 = -$6,500

Question 1(b)

Accounting profit only considers the explicit cost, whereas economic profit considers
both the explicit and implicit costs, or the opportunity cost associated with using a
factor of production that a firm already owns and does not have to pay rent for.
Positive accounting profit results from the revenue's ability to pay for the explicit costs,
such as the interest owed to his uncle and the cost of the supplier. However, because
the implicit cost included the opportunity cost of his savings and the opportunity cost
of operating the painting business, the revenue is unable to cover both the explicit and
implicit costs.

Question 1(c)

Since opportunity cost is a constant, the accounting profit must typically exceed the
economic profit. There is lost opportunity when the funds could be invested. As such,
the implicit cost will have to be factored into the economic profit.

Question 2(a)

Quantity 1 2 3 4 5 6 7
Firm A
60
(price) 70 80 90 100 110 120
Firm A
60
(ATC) 35 27 23 20 18 17
Firm A
60
(MC) 10 10 10 10 10 10
Firm B 11
(price) 24 39 56 75 96 119
Firm B
11
(ATC) 12 13 14 15 16 17
Firm B
11
(MC) 13 15 17 19 21 23

Question 2(b)

Economies of scale are the cost savings that a business realizes as its output level rises.
The benefit results from the inverse relationship that exists between the quantity
produced and the fixed cost per unit. The fixed cost per unit decreases as production
volume increases. Hard Copy An understanding of economics of scales is necessary
because, as quantity increases, the average total cost decreases. Because the average
total cost rises with an increase in quantity, Firm B is not demonstrating economics of
scale.

Question 2(c)

The reason the marginal cost curve is U-shaped is that it increases with increasing
quantity and decreases with decreasing quantity. Both the average total cost and the
marginal cost will decrease as the quantity increases because there will be more
products to split the cost among. The marginal cost will rise when production reaches
its optimal point because the current production scale might not be able to handle the
growing quantity.

Question 3(a)

Lopes: Increase the size of store and parking lot

HomeMax: Increase the size of store and parking lot

Question 3(b)

Nash equilibrium states that a player can achieve the desired outcome by not deviating
from their initial strategy, implying that each player's strategy is also optimal when
considering the decisions of other players. Nash equilibrium occurs when both Lopes
and HomeMax choose not to expand the store and parking lot.

Question 3(c)
There is a prisoners' dilemma because both Lopes and HomeMax benefit when they
betray each other and choose to expand the store and parking lot. However, if they
both decide to expand the size of the store and parking lot, they may end up enjoying
less than the outcome in Nash equilibrium.

Question 3(d)

Since every game has a Nash equilibrium that displays the best strategy throughout the
game and places every player in the best possible situation, it is possible that there is a
Nash equilibrium even when no player has the dominating strategy.

Question 4(a)

Price Quantity Total revenue Marginal revenue

10 5 50 50
9 10 90 40
8 16 128 38
7 23 161 33
6 31 186 25
5 45 225 39
4 52 208 -17
3 60 180 -28

Question 4(b)

Profit maximizing output level: 16

Profit maximizing price: $8

The average total cost at profit maximizing output level: $8.5

Question 4(c)
Question 4(d)

In a market with perfect competition, there are countless companies producing

identical goods. Because every company in the market is so tiny, it is unable to affect
output or price. As a result, every company acts as a price taker.

In monopolistic corn-petition, a sizable number of vendors offer marginally distinct

goods. Product differentiation gives a company some control over output and price.
This implies that vendors act in a "price-making" manner. A monopoly seller, however,
is completely in charge of choosing its price-output.

Businesses can enter and exit the market with total freedom, whether there is
monopolistic or perfect competition. This is only true for the extended period of time.
Both of these market forms prohibit entry or exit in the near term. Yet, the lack of a
competing seller characterizes a monopoly business. It is illegal for new businesses to
enter monopolies.