Problem Set #1 NAME:

Micro II – Winter Term 2022

DUE DATE: Monday 26th September 2022 by 1:30PM.

Instructions: Students may work in groups on the problem set. Each student must turn in his/her
OWN response to the problem set (i.e. one assignment with multiple names on it will not be
accepted).NO LATE ASSIGNMENTS WILL BE ACCEPTED!

1. A firm faces the following average revenue (demand) curve: P = 120 - 0.02Q
where Q is weekly production and P is price, measured in cents per unit. The firm’s cost
function is given by C = 60Q + 25,000. Assume that the firm maximizes profits.

a. What is the level of production, price, and total profit per week for the monopolist?

b. What would the equilibrium price and quantity be in a competitive market? HINT: Let the
monopolist’s MC curve proxy for the industry supply curve.

c. What would the social gain be if this monopolist were forced to produce and price at the
competitive equilibrium? Who would gain and lose as a result?

d. BACK TO MONOPOLY: If the government decides to levy a tax of 14 cents per unit on this
product, what will be the new level of production, price, and profit?
2. The data in the following table give information about the price (in dollars) for which a firm
can sell a unit of output and the total cost of production.

a) Fill in the blanks in the table.

b) What happens to the firm’s output choice and profit if the price of the product falls from $60
to $50?

Q P TR TC  MC MR TR MR 
P = 60 P = 60 P = 60 P = 50 P = 50 P = 50
0 60 100
1 60 150
2 60 178
3 60 198
4 60 212
5 60 230
6 60 250
7 60 272
8 60 310
9 60 355
10 60 410
11 60 475

c) Derive the firm’s short-run supply curve. (Hint: you may want to plot the appropriate cost
curves.)
3. A competitive firm has the following short run cost function:
.
a) Find MC, AC, and AVC and sketch them on a graph.

b) At what range of prices will the firm supply zero output?

c) Identify the firm’s supply curve on your graph.

d) At what price would the firm supply exactly 6 units of output?

4. Suppose that a firm’s production function is in the short run, where there are fixed
costs of $1,000 and x is the variable input, whose cost is $4,000 per unit.
a) What is the total cost of producing a level of output q. In other words, identify the total
cost function C(q).

b) Write down the equation for the firm’s supply curve.

c) If there are 50 identical firms, what is the industry supply curve?

5. Suppose Bella's Birkenstocks produces sandals in the perfectly competitive sandal market.
The total cost of production in the short run is STC = 64 + q2. The long run total cost LTC is
also 64 + q2, except that LTC = 0 at q = 0 in the long run (i.e. LTC(0) = 0, LTC(1) = 65,
LTC(2)= 69 etc.).

a) What are SATC, SAVC and SMC?

b) If the price of sandals is $32 in the short run, what is Bella's production? What is the
economic profit?

c) If the price for sandals were $8 in the short run, what is Bella's production? What is her
economic profit? Should she shut down?

d) Is there any price which would cause Bella to shut down in the short run?

e) What is Bella's short run supply curve?

Now suppose in the short run there are 19 other sandal producers, each with the same costs as
Bella.
f) What is industry output at a price of $32 in the short run?

g) If the demand for sandals is Q = 640 -10P, how many sandals are sold in the short run
with 20 producers? (Hint: Find the industry’s supply curve first)

h) What is the profit earned by each company?

i) If the sandal industry is a constant cost industry in the long run, what is the long run price
and quantity? How many firms are there in the industry?

j) Is the constant cost assumption reasonable?

6. Suppose you are given the following information about a particular industry:

Assume that all firms are identical, and that the market is characterized by pure competition.
a) Find the equilibrium price, the equilibrium quantity, the output supplied by the firm, and
the profit of the firm.

b) Would you expect to see entry into or exit from the industry in the long-run? Explain.
What effect will entry or exit have on market equilibrium?
c) What is the lowest price at which each firm would sell its output in the long run? Is
profit positive, negative, or zero at this price? Explain.

d) What is the lowest price at which each firm would sell its output in the short run? Is
profit positive, negative, or zero at this price? Explain.
7. Assume a perfectly competitive firm has the cost schedule given below:
Output TFC TVC TC
0 $300 $0 $300
1 300 100 400
2 300 150 450
3 300 210 510
4 300 290 590
5 300 400 700
6 300 540 840
7 300 720 1020
8 300 950 1250
9 300 1240 1540
10 300 1600 1900

a) Complete the table below to show the total revenue and total profit of the firm at each
level of output the firm might produce. Assume the market prices of $55, $ 120 and $200.

Market Price $55 Market Price $ 120 Market Price $200

Output Revenue Profit Revenue Profit Revenue Profit
0
1
2
3
4
5
6
7
8
9
10

b) What is the output produced by the firm and the profit associated with it if the price is
(i) $55 (ii) $120 (iii) $200?
Now assume for the same firm, the following schedule of average and marginal costs are given
in the table below.

Output AFC AVC ATC MC

0
1 $300 $100 $400 $100
2 150 75 225 50
3 100 70 170 60
4 75 73 148 80
5 60 80 140 110
6 50 90 140 140
7 43 103 146 180
8 38 119 156 230
9 33 138 171 290
10 30 160 190 360

c) What is the output produced by the firm and the profit associated with it if the price is
(i) $55 (ii) $120 (iii) $200?

d) In the table below, complete the supply schedule for the competitive firm and state what
economic profit will be at each price.

Price Quantity Supplied Profit

$360 $
290
230
180
140
110
80
60
e) If there are 100 firms in the industry and all have the same cost schedule, complete the
market table below

Quantity Demanded Price Quantity Supplied

400 $360
500 290
600 230
700 180
800 140
900 110
100 80

f) What will be the market price of the product?

g) How much will each firm produce at the market price given in part (f)? What will be the
firm’s profit? Will firms enter or exit the market in the long run?

h) If the total costs given above for the individual firm are assumed to be long run total costs
and if the industry is a constant cost industry, what will be the market price in the long
run? What output will be produced by each firm? What will be the profit per firm?
Approximately how many firms will be in the industry in the long run?