ECON212-04, Homework Assignment Chapters 14 and 15.

Chapter 14

1. Consider total cost and total revenue given in the following table:

Quantity  0 1  2  3  4  5  6  7

Total cost $8 9 10 11 13 19 27 37

Total $0 8 16 24 32 40 48 56
revenue

a. Calculate the profit for each quantity. How much should the firm produce to
maximize profit?
b. Calculate marginal revenue and marginal cost for each quantity. Graph them. (Hint:
Put the points between whole numbers. For example, the marginal cost
between 2 and 3 should be graphed at 2-1/2 .) At what quantity do these curves cross?
How does this relate to your answer to part (a)?

2. A profit-maximizing firm in a competitive market is currently producing 100 units of

output. It has average revenue of $10, average total cost of $8, and fixed cost of $200.
a. What is its profit?
b. What is its marginal cost?
c. What is its average variable cost?
d. Is the efficient scale of the firm more than, less than, or exactly 100 units?
Chapter 15
1. A publisher faces the following demand schedule for the next novel from one of its
popular authors:

Price Quantity Demanded

$100          0 novels
    90    100,000
    80    200,000
    70    300,000
    60    400,000
    50    500,000
    40    600,000
    30    700,000
    20    800,000
    10    900,000
      0 1,000,000

The author is paid $2 million to write the book, and the marginal cost of publishing
the book is a constant $10 per book.
a. Compute total revenue, total cost, and profit at each quantity. What quantity
would a profit-maximizing publisher choose? What price would it charge?
b. Compute marginal revenue. (Recall that MR=ΔTR/ΔQ .) How does marginal
revenue compare to the price? Explain.
c. Graph the marginal revenue, marginal cost, and demand curves. At what
quantity do the marginal revenue and marginal cost curves cross? What does
this signify?
d. In your graph, shade in the deadweight loss. Explain in words what this
means.
e. If the author were paid $3 million instead of $2 million to write the book, how
would this affect the publisher’s decision regarding what price to charge?
Explain.
f. Suppose the publisher was not profit-maximizing but was instead concerned
with maximizing economic efficiency. What price would it charge for the
book? How much profit would it make at this price?

2. Henry Potter owns the only well in town that produces clean drinking water. He faces
the following demand, marginal revenue, and marginal cost curves:
‍Demand:‍ P = 70 – Q
Marginal Revenue:‍MR = 70 - 2Q
Marginal Cost: ‍MC = 10 + Q
a. Graph these three curves. Assuming that Mr Potter maximizes profit, what
quantity does he produce? What price does he charge? Show these results on
your graph.
b. Mayor George Bailey, concerned about water consumers, is considering a
price ceiling 10 per cent below the monopoly price derived in part (a). What
quantity would be demanded at this new price? Would the profit-maximizing
Mr. Potter produce that amount? Explain. (Hint: Think about marginal cost.)
c. George’s Uncle Billy says that a price ceiling is a bad idea because price
ceilings cause shortages. Is he right in this case? What size shortage would the
price ceiling create? Explain.
d. George’s friend Clarence, who is even more concerned about consumers,
suggests a price ceiling 50 per cent below the monopoly price. What quantity
would be demanded at this price? How much would Mr Potter produce? In
this case, is Uncle Billy right? What size shortage would the price ceiling
create?