East West University

Semester: Spring’ 2021; ECO 101 (S07);

Assignment – IV
Due on 18 May, 2021

1. A firm in a competitive market receives $500 in total revenue and has marginal
revenue of $10. What is the average revenue, and how many units were sold?
(2 marks)

2. An industry currently has 100 firms, each of which has fixed cost of $16 and average
variable cost as follows:

a. Compute a firm’s marginal cost and average total cost for each quantity from 1 to 6.
b. The equilibrium price is currently $10. How much does each firm produce? What is the
total quantity supplied in the market?
c. In the long run, firms can enter and exit the market, and all entrants have the same costs
as above. As this market makes the transition to its long-run equilibrium, will the price rise
or fall? Will the quantity demanded rise or fall? Will the quantity supplied by each firm rise
or fall? Explain your answers.
d. Graph the long-run supply curve for this market, with specific numbers on the axes as
relevant.
(4+4+6+2 marks)

3. A publisher faces the following demand schedule for the next novel from one of its
popular authors:

The author is paid $2 million to write the book, and the marginal cost of publishing the
book is a constant $10 per book.

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 East West University
Semester: Spring’ 2021; ECO 101 (S07);
Assignment – IV
Due on 18 May, 2021

a. Compute total revenue, total cost, and profit at each quantity. What quantity would a
profit-maximizing publisher choose? What price would it charge?
b. Compute marginal revenue. (Recall that MR = ΔTR/ΔQ.) How does marginal revenue
compare to the price? Explain.
c. Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do the
marginal-revenue and marginal-cost curves cross? What does this signify?
d. In your graph, shade in the deadweight loss. Explain in words what this means.
e. If the author were paid $3 million instead of $2 million to write the book, how would this
affect the publisher’s decision regarding what price to charge? Explain.
f. Suppose the publisher was not profit-maximizing but was concerned with maximizing
economic efficiency. What price would it charge for the book? How much profit would it
make at this price?
(12 marks)

4. Define perfect competition, monopoly, oligopoly, and monopolistic competition

market and give example of each. Draw a table showing the comparison of all these
four market structure (including similarities and differentiating features).
(8+12 marks)

Best of Luck!

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