BECO100 ASSIGNMENT 2

Deadline: 13th Dec., 2013 (Please submit before 17:00)

Submit to: Mr. Sun (B1-A303)
Please submit the answer of Q1, Q2, and Q4, the others are just for
the purpose of practice.
1. Frances sells earrings in the perfectly competitive earrings market. Her output per
day and her costs are as follows:
Output per day
Total cost ($)

0
1

1
2.5

2
3.5

3
4.2

4
4.5

5
5.2

6
6.8

7
8.7

8
10.7

9
13

a) If the current equilibrium price in the earrings market is $1.9, how many
earrings will Frances produce, what price will she charge, and how much
profit (or loss) will she make? Draw a graph to illustrate your answer. Your
graph should be clearly labeled and should include Francess demand, ATC,
AVC, MC, and MR curves; the price she is charging; the quantity she is
producing; and the area representing her profit (or loss).
b) Suppose the equilibrium price of earrings falls to $0.7. Now how many
earrings will Frances produce, what price will she charge, and how much
profit (or loss) will she make? Should Frances shut down? Explain. Draw a
graph to illustrate this situation, using the instructions in part a.
2. As the only cement producer within 200 miles, Sam faces a downward-sloping
demand curve, which is given in the table below. Sams marginal cost is $2.00 per
ton (imagine MC=AC), and he has fixed costs of $1000.
Price ($)
Quantity(tons MR
TR
)
4
400
3.5
800
3
1400
2.5
2800
2
4000
a) Calculate revenue and marginal revenue, and add these to the table.
b) Find the profit-maximizing price and quantity. What is Sams cost and profit at
this price.
c) Suppose that Sams fixed costs fall to $500. What is his profit-maximizing
price and quantity, and how much does he earn in profits?
d) Illustrate answer b) with a diagram.
3. Jim and Sam are the only two dentists in Barbara. They have been colluding,
sharing the market and earning monopoly profits of $100,000 each for several
years. Jim is considering reducing his price. He estimates that if Sam keeps his
price at current levels, he would earn $150000, although Sams earnings would fall
to $25000. There is also the possibility that Sam would compete against Jim. The
resulting would reduce the earnings of each to $40000
a) Use a payoff matrix to represent this market.

b) Find the Nash equilibrium in this market. Explain your answers.

4. A firms long-run average total cost (in dollars) equals 5+3/Q, where Q is the
firms output per year.
a) If the monopolist maximizes profit, what is the value of marginal revenue in
the long run?
b) In the long run, under the circumstances described in a), what price level
should be so that the firm will not leave the market? Explain your answer, and
show it in a diagram.
5.

Explain how, in the long run, any economic profits will be eliminated in a
monopolistically competitive industry. Use graph(s) to show your answer also.