Chapter 22

 

Problems 1-5,11

 

1. Use the following to calculate profit at each quantity of output.

 

 

 

(Total) Output (Q)           Price (P)                               Total Revenue (TR)         Total Cost (TC)

 

0                              $1,900                   $ 0                                          $1,000

 

1                              $1,700                   $ 1,700                                  $2,000

 

2                              $1,650                   $ 3,300                                  $2,800

 

3                              $1,600                   $ 4,800                                  $3,500

 

4                              $1,550                   $ 6,200                                  $4,000

 

5                              $1,500                   $ 7,500                                  $4,500

 

6                              $1,450                   $ 8,700                                  $5,200

 

7                              $1,400                   $ 9,800                                  $6,000

 

8                              $1,350                   $10,800                                 $7,000

 

9                              $1,300                   $11,700                                 $9,000

 

 

 

 2. Use the table in exercise 1 to calculate marginal revenue and marginal cost.

 

3. Use the information in exercises 1 and 2 to graphically show maximum profit. Label the profit maximizing quantity and price, total cost, total revenue, and profit.

 

4. Can accounting profit be positive and economic profit negative? Can accounting profit be negative and economic profit positive? Explain.

 

5. Use the following information to calculate accounting profit and economic profit.

 

Sales $100

 

Employee expenses $40

 

Inventory expenses $20

 

Value of owner’s labor in any other enterprise $40

 

 

 

General                                Barclays Bank     Microsoft

 

Motors

 

Sales                      $50,091                                 $5,730                   $2,750

 

Wages and

 

salaries                                 $29,052                                 $3,932                   $ 400

 

Cost of capital    $12,100                 $ 750                     $ 35

 

Interest on debt               $ 7,585                  $ 275                      $ 5

 

Cost of materials              $ 6,500                  $ 556                      $1,650

 

 

 

11. Use the information in the table to calculate total revenue, marginal revenue, and marginal cost.  Indicate the profit-maximizing level of output. If the price was $3 and fixed costs were $5, what would

 

variable costs be? At what level of output would the firm produce?

 

 

 

Chapter 23.

 

Problems 1,14

 

 

 

1. Cost figures for a hypothetical firm are given in the following table. Use them for the exercises below. The firm is selling in a perfectly competitive market.

 

 

 

OutputFixed Cost      AFC      Variable Cost            AVC Total Cost ATC        MC

 

1              $50                                          $ 30

 

2              $50                                          $ 50

 

3              $50                                          $ 80

 

4              $50                                        $120

 

5              $50                                        $170

 

 

 

 a. Fill in the blank columns.

 

b. What is the minimum price needed by the firm to break even?

 

c. What is the shutdown price?

 

d. At a price of $40, what output level would the firm produce? What would its profits be?

 

 

 

14. Use the following data for the exercises below.

 

 

 

                Quantity                              Quantity

 

Price      Supplied                              Demanded

 

$20         30                           0

 

$18         25                           5

 

$16         20                           10

 

$14         15                           15

 

$12         10                           20

 

$10         5                             25

 

$ 8          0                              30

 

 

 

a. What is the equilibrium price and quantity?

 

b. Draw the demand and supply curves. If this represents perfect competition, are the  curves individual-firm or market curves? How is the quantity supplied derived

 

c. Show the consumer surplus. Show the producer surplus.

 

d. Suppose that a price ceiling of $12 was imposed. How would this change the consumer and producer surplus? Suppose a price floor of $16 was imposed. How would this change the consumer and producer surplus?

 

 

 

Chapter 24.

 

6,8

 

 

 

6. In the following figure, if the monopoly firm faces ATC1 , which rectangle measures total profit? If the monopoly firm faces ATC2 , what is total profit? What information would you need in order to know whether the monopoly firm will shut down or continue

 

producing in the short run? In the long run?

 

 

 

 

8. Consider the following demand schedule. Does it apply to a perfectly competitive firm? Compute marginal and average revenue.

 

 

 

Price      Quantity              Price      Quantity

 

$95         2              $55          5

 

$88         3             $40          6

 

$80         4             $22         7

 

 

 

 

 

Chapter 25

 

Problems 11,13

 

11. The cement industry is an example of an undifferentiated oligopoly. The automobile industry is a differentiated oligopoly. Which of these two is more likely to advertise? Why?

 

 

 

13. Use the payoff matrix below for the following exercises. The payoff matrix indicates the profit outcome that corresponds to each firm’s pricing strategy.

 

 

 

Firm A’s Price

 

$20                                         $15

 

$20         Firm A earns $40 profit  Firm A earns $35

 

Firm B earns $37 profit                   profit

 

                                                                Firm B earns $39

 

$15         Firm A earns $49 profit                 profit

 

                Firmt B earns $30 profitFirm A earns $38

 

profit

 

                                                                                Firm B earns $35

 

profit

 

 

 

a. Firms A and B are members of an oligopoly. Explain the interdependence that exists in oligopolies using the payoff matrix facing the two firms.

 

b. Assuming that the firms cooperate, what is the solution to the problem facing the firms?

 

c. Given your answer to part (b), explain why cooperation would be mutually beneficial and then explain why one of the firms might cheat.