Eric Stevanus – 2201756600 – LA28

Individual Assignment ke 8 LA28

1. The following graph summarizes the demand and costs for a firm that operates in a per- fectly
competitive market.

a. What level of output should this firm produce in the short run?

P/MR = MC  7units

b. What price should this firm charge in the short run?

P = MR = Df $28

c. What is the firm’s total cost at this level of output?

32/unit Total Cost = 7 x 32 =$224

d. What is the firm’s total variable cost at this level of output?

14/unit Total Variable Cost = 7 x 14 = $98

e. What is the firm’s fixed cost at this level of output?

18/unit Total Fixed Cost = 7 x 18 = $126

f. What is the firm’s profit if it produces this level of output?

Profit/Loss = (P – ATC) x Q

= (28 -32) x 7

= -$28 (LOSS)

g. What is the firm’s profit if it shuts down?

Profits if the company shutdown = - fixed cost = - $126

h. In the long run, should this firm continue to operate or shut down

Since Price is below the Total cost but above the Average cost, then Firm should exit in the
long run if there is no changes to the market price or the firm’s production cost.
 Eric Stevanus – 2201756600 – LA28

2. A firm sells its product in a perfectly competitive market where other firms charge a price of $90
per unit. The firm’s total costs are C(Q) = 50 + 10Q + 2Q 2

a. How much output should the firm produce in the short run?

MC = 10 +4Q , P = $90

Optimal Output  P = MC

90 = 10+4Q

Q = 20 units

b. What price should the firm charge in the short run?

$90, Firms in a perfectly competitive market have to follow the market price.

c. What are the firm’s short-run profits?

C(20) = 50 + (10 x 20) + (2 x 400) Revenue = $90 x 20 units

= $1.050 = $1.800

Profits = Revenue – Total Cost = $1.800 – $1.050

= $750

d. What adjustments should be anticipated in the long run?

New firms will keep entering the market until the price is really close to the minimum average
total cost graph, which is a point where there are no more economic profits or reach a point of
 Eric Stevanus – 2201756600 – LA28
close to zero normal profits.And then firms would have no reasons to leave or to enter the
market anymore

3. The following graph summarizes the demand and costs for a firm that operates in a
monopolistically competitive market.

a. What is the firm’s optimal output?

MR = MC  7 units

b. What is the firm’s optimal price?

$130

c. What are the firm’s maximum profits?

($130 - $110) x 7 units = $140

d. What adjustments should the manager be anticipating?

firm's demand will decrease over time as new firms enter the market. in the long run,
economic profits will shrink to zero

4. You are the manager of a monopoly, and your demand and cost functions are given by P = 300 -
3Q and C(Q) = 1,500 + 2Q2, respectively.

a. What price–quantity combination maximizes your firm’s profits?

TR = 300Q - 3Q 2 MR = 300 – 6Q
 Eric Stevanus – 2201756600 – LA28
Cost = 1500 +2Q 2 MC = 4Q

Max Profit  MR = MC

300 – 6Q = 4Q

Q = 30 units , Price = $210

b. Calculate the maximum profits.

Revenue (30 units) = 30 x $210 = $6.300

Cost (30 units) = 1.500 + (2 x 900) = $3.300 –

= $3.000

c. Is demand elastic, inelastic, or unit elastic at the profit-maximizing price–quantity combination?

MR=300 – (6 x 30) =120, >0 which means that it’s elastic.

d. What price–quantity combination maximizes revenue?

Maximum revenue = unit elastic ,MR = 0

300-6Q=0

Q=50 units

P(50 units) = 300 – (3 x 50)

= 300 – 150

= $150

P = $150 , Q = 50 units

e. Calculate the maximum revenues.

Max Revenue = $150 x 50 units

= $7.500

f. Is demand elastic, inelastic, or unit elastic at the revenue-maximizing price–quantity

combination?

Max Revenue Unit Elastic

5. You are the manager of a firm that produces a product according to the cost function C(qi) = 160
+ 58qi − 6qi2 + qi3. Determine the short-run supply function if:

a. You operate a perfectly competitive business.

 Eric Stevanus – 2201756600 – LA28
Firm supply curve = MC, but has to be above the AVC to maintain operations=

MC = 58 - 12qi + 3qi2

Shutdown point: MC= minimum AVC

AVC(i) = (58qi - 6qi2 + qi3)/ qi

= 58 - 6qi + qi^2

MC=AVC

58 - 12qi + 3qi2 = 58 - 6qi + qi2

2qi2-6qi=0

qi = 3

Minimal Price at minimal average cost point=

AVC = 58 + 6(3) + 3^2 = $49

Thus, the firm's supply curve is

MCi = 58 - 12qi + 3qi^2 if P >= 49, otherwise, the firm produce zero units.

b. Monopoly

A monopolist produces where MR = MC and thus does not have a supply curve.

c. Monopolistically competitive business.

A monopolistically competitive firm also produces where MR = MC and thus does not have a supply
curve

6. The accompanying diagram shows the demand, marginal revenue, and marginal cost of a
monopolist.

a. Determine the profit-maximizing output and price.

Max Profit MR = MC  Q = 3 units , Price = $70

b. What price and output would prevail if this firm’s product were sold by price-taking firms in a
perfectly competitive market?

Q=4 Units and price= $60

c. Calculate the deadweight loss of this monopoly.

 Eric Stevanus – 2201756600 – LA28
1
×(70−40)×1=$15
2

7. You are the manager of a monopolistically competitive firm, and your demand and cost
functions are given by Q = 36 - 4P and C(Q) = 4 + 4Q + Q 2

a. Find the inverse demand function for your firm’s product.

P=9−0,25 Q
b. Determine the profit-maximizing price and level of production.

T R=9 Q−0,25 Q2
M R=9−0,5 Q , M C=4+ 2Q
M R=MC
9−0,5 Q=4+2 Q
2, 5 Q=5
Q=2units
P=$ 8,5

c. Calculate your firm’s maximum profits.

TR= 2 x 8,5 = $17

TC= 4 + (4 x 2) + 22 = $16

Maximum Profits = $1

d. What long-run adjustments should you expect? Explain.

 Eric Stevanus – 2201756600 – LA28
New business will enter the market and demand for the firm’s product would
fall since more substitutes will enter the market, and if nothing changes in the
firm’s product , or strategies, then the demand would fall until there will be no
more economic profits for the firms.

8. The elasticity of demand for a firm’s product is –2.5 and its advertising elasticity of demand is
0.2.

a. Determine the firm’s optimal advertising-to-sales ratio.

The optimal advertising to sales ratio =

A EQ , A
= = 0.2 : 0.25 = 0,08
R −EQ , P
b. If the firm’s revenues are $40,000, what is its profit-maximizing level of
advertising?

0.08 x 40.000 = $3.200

9. A monopolist’s inverse demand function is P = 150 − 3Q. The company produces out- put at two
facilities; the marginal cost of producing at facility 1 is MC 1(Q1) = 6Q1, and the marginal cost of
producing at facility 2 is MC2(Q2) = 2Q2.

a. Provide the equation for the monopolist’s marginal revenue function. (Hint:
Recall that Q1 +Q2 =Q.)

TR= 150Q-3Q2

MR= 150- 6Q

MR=150- 6Q1 -6Q2

b. Determine the profit-maximizing level of output for each facility.

150- 6Q1 -6Q2 = 6Q1

150- 6Q1 -6Q2 = 2Q2

0=6Q1 – 2Q2

Q2 = 3Q1

150 - 6Q1 - 18Q1 = 6Q1

150 =30Q1

Q1 = 5 Units

Q2 = 15 Units
 Eric Stevanus – 2201756600 – LA28
c. Determine the profit-maximizing price.

P = 150 – (3 x 20) = $90

10. The manager of a local monopoly estimates that the elasticity of demand for its product is
constant and equal to –3. The firm’s marginal cost is constant at $20 per unit.

a. Express the firm’s marginal revenue as a function of its price.

MR=P ( 1−3
−3 )
2
MR= P
3
b. Determine the profit-maximizing price.

2
P=20
3
P=$ 3 0