Homework #4

Economics 102 – Microeconomics

Professor Schenk

Due: July 27, 2008

1. Presume a firm is manufacturing Widgets. Below is the cost schedule for the
production from 1 to 10 goods.

Quanti Variable Fixed Total Margin AVC AFC AC

ty Cost Cost Cost al
Cost
1 $11 $120
2 20 120
3 27 120
4 32 120
5 40 120
6 54 120
7 70 120
8 100 120
9 135 120
10 175 120

a. Calculate the Total Cost

b. Calculate the Marginal Cost (by definition the fixed cost for producing 0
is $120 and the variable cost is $0)

c. Calculate the Average variable cost, average fixed cost, and average
total cost.

d. What are the break-even and shut-down prices?

2. Presume a consumer has a choice between Doodad and Widgets. Widgets is
the same product manufactured in question #1.

a. Assume the price of Doodads was $200 and the budget constraint is
$2,000. Calculate the number of Widgets consumed when the price of
Widgets is $100, $200, and $400.

Price = Price = Price = Price = Price = Price =

$200 $100 $200 $100 $200 $100
Doodad Widget Doodad Widget Doodad Widget
10 10 10
9 9 9
8 8 8
7 7 7
6 6 6
5 5 5
4 4 4
3 3 3
2 2 2
1 1 1
0 0 0
 b. Below are three indifference curves: X, Y, and Z. Note that
consumption along Z is preferred to Y and Y is preferred to X. Draw the
three budget constraints from 2a and all three indifference curves on a
separate graph. What is the optimal consumption of Widgets when the
price is $100, $200, and $400?

Indifference Indifference Indifference

Curve 1 Curve 2 Curve 3
Dooda Widget Dooda Widget Dooda Widget
d d d
10 8 10 4 10 1
5 10 3 7 2 4
4 15 2 13 1 9
c. Draw the demand curve using information from 2b and draw the
supply curve using information from question 1 on the same plane.
What is the approximate equilibrium for Widgets?