1 Emporia State University

School of Business
Spring 2022
BC 807 OA
Homework 8 Total Points = 20

Homework 8 is due on Sunday, April 24th by 11:59 pm (Central Time). No extensions will be
granted. The class website on Canvas will stop accepting homeworks at 12:00 am on Monday,
April 25.

All homeworks must be uploaded to Canvas using the procedure described on the website (and
in the course syllabus). This is the ONLY way in which homeworks may be submitted.
Homeworks SHOULD NOT be sent by email, handed to the department secretary or
anyone else in the department office, left in my mailbox at the department office, slid under
my door or left outside my office (if you submit your homework through any of these methods,
I will not grade it and you will get a grade of zero for that homework).

The file containing your answers should be typed in Microsoft Word and the file name
MUST be “Homework8.YourName.docx” where YourName is your name (eg. JohnSmith)
(eg. Homework8.JohnSmith.docx).

You may use Google Docs to prepare your homework, but please upload the actual document
and DO NOT just send me a link to the document. You may also submit a PDF document with
your answers.

You should type all answers. Equations and graphs may be written/drawn by hand and then
scanned into your document. While you may discuss the homework with others, you should
write the answers by yourself. If two students submit identical (or largely similar answers) both
students will get zero points. Further penalties may apply.

All answers MUST be included in one file, even if you have to scan graphs or equations. It
is possible to include scanned images in Word documents, and they certainly can be included in
PDF documents. Please DO NOT submit multiple files with your answers.

Your answers must not be copied out of the textbook or from anywhere else, including the
internet. Copied assignments will be subject to sanctions, up to and including an administrative
withdrawal from the class.
1. (5 points) Manufacturers of laundry detergent and dishwashing soap reinvest a relatively large
percentage of their sales revenues on advertising campaigns. Most of these advertisements that
appear on television stress the fact that their product is "New and Improved" and “better than
other leading brands”. What sort of a market (perfectly competitive, monopoly, monopolistically
competitive) is laundry detergent and why are the firms advertising? Please give an explanation.

2. (5 points) When the government gives a patent to a company, it effectively creates a
monopoly because no other company can copy the product on which the patent is granted for as
long as the patent is valid (which is usually for 20 years). This monopoly often leads to higher
prices for consumers, particularly in the prescription drug industry when patents are granted on
new drugs. Why does the government grant a patent to companies which invent new products
like prescription drugs, if these patents lead to higher prices for consumers? Please give an
explanation.

3. (5 points)

1000

The above graph is for a perfectly competitive firm. The curve labelled “SMC “ is the Marginal
Cost curve, D = Demand and Marginal Revenue curve, ATC = average total cost curve, AVC is
the average variable cost curve.
(a) What is the profit maximizing price and output?
(b) At the profit maximizing price and output what is the average total cost and average variable
cost and average fixed cost?
(c) At the profit maximizing price and output what is the amount of profit earned by this firm?
(d) At what price would the firm earn zero profit (or loss)?

4. (5 points) The owner of an Italian restaurant has just been notified by her landlord that the
monthly lease on the building in which the restaurant operates will increase by 20 percent at the
beginning of the year. Her current prices are competitive with nearby restaurants of similar
quality. The restaurant industry in this town is perfectly competitive (meets all the
assumptions of perfect competition). However, she is now considering raising her prices by
20 percent to offset the increase in her monthly rent. Nearby restaurants do not experience a
similar increase in their rent and therefore have no intention of changing their prices. Would
you recommend that the owner of the Italian restaurant raise prices? Please give an explanation.