Assignment 02

Subject: Managerial Economics and Policy Name:

Program: MBA Max. Marks: 10

Department of Business Administration

Instructions:

Solve all the given problems and upload the file on blackboard under the assignment 2.

1. The Hamilton Company is a member of a perfectly competitive industry. Like all

members of the industry, its total cost function is 2 marks

TC=25,000+150 Q+3 Q 2

where TC is the firm’s monthly total cost (in dollars) and Q is the firm’s monthly output.
a. If the industry is in long-run equilibrium, what is the price of the Hamilton Company’s
product?
b. What is the firm’s monthly output?

Answer:

For a perfectly competitive firm, in the long run, firm produces at the minimum point of average total
cost.
TC = 25000 + 150Q + 3Q^2
ATC = (25000 / Q) + 150 + 3Q

Minimum of ATC occurs when [d(ATC) / dQ] = 0 occurs.

ATC = 25000Q^-1 + 150 + 3Q
d(ATC) / dQ = - (25000 / Q^2) + 3
25000 / Q^2 = 3
Q^2 = (25000 / 3) Q = (25000 / 3)1 / 2 Q = 91.29 or 91.3 Now, we knew that, for perfectly competitive
firm P = AC . So, P = (25000 / 91.3) + 150 + 3 * (91.3) = 697.72 or 697.7 a) So, if the industry is in long-run
equilibrium, the price of the Hamilton Company’s product is $697.7. b) The firm's monthly output is 91.3
units.

2. In 2012, the box industry was perfectly competitive. The lowest point on the long-run
average cost curve of each of the identical box producers was $4, and this minimum
 point occurred at an output of 1,000 boxes per month. The market demand curve for
boxes was 2 marks

Q D=140,000−10,000 P

where P was the price of a box (in dollars per box) and QD was the quantity of boxes
demanded per month. The market supply curve for boxes was

QS =80,000+5,000 P

Where QS was the quantity of boxes supplied per month.

a. What was the equilibrium price of a box? Is this the long-run equilibrium price?
b. How many firms are in this industry when it is in long-run equilibrium?

3. Given TC = 100 + 60Q – 12Q2 + Q3, find: 2 marks

a. The equations of the TVC, AVC, and MC functions.
b. The level of output at which AVC and MC are minimum, and prove that the AVC
and MC curves are U-shaped.
c. Find the AVC and MC for the level of output at which the AVC curve is
minimum.

4. Determine the best level of output for a perfectly competitive firm that sells its
product at P = $4 and faces TC = 0.04Q3– 0.9Q2 + 10Q + 5. Will the firm produce
this level of output? Why? 2 marks

5. Given the following cost function: TC = 1500 + 15Q – 6Q 2 + Q3 2 marks

a. Determine the total fixed cost for producing 1000 units of output and 500 units of
output.
b. What is AFC at:
i. 1000 units of output b)
ii. 500 units of output iii.
c. Determine TVC, AVC, MC and AC at 50 units of output.

Answer:

a). Total fixed cost

at Q=1000
FC = 1500

at Q=500
FC = 1500

b). AFC = FC/Q

i. at Q = 1000
AFC = 1500/1000 = 1.5

ii. at Q = 500
AFC = 1500/500=3

c). TVC = TC – FC = 15Q – 6Q2 + Q3

AVC = TVC/Q = 15 - 6Q + Q^2

AC = TC/Q = 1500/Q+15-6Q+Q^2

MC = dTC/dQ=15-12Q+3Q^2
at Q = 50
TVC = 15(50) -6(50)^2 + (50)^3
= 750 -15000 + 125000
= 110750

AVC = TVC/Q
110750/50=2215
AC = 1500/50+15 - 6(50)+50^2
= 2245

MC = 15 -12(50) + 3(50)^2
= 6915

TVC = 110750
TVC = 110750
AVC = 2215
MC = 6915
AC = 2245