P ROBLEM SET 4

1. A price-taking firm has short-run total costs given by C(q) = 100 + 2q + q 2 .

(i) Find the average avoidable cost and the marginal cost as a function of the output?

(ii) Find its short-run supply curve and show it graphically.

2. Suppose a firm’s marginal cost is given by M C(q) = 10 + q and its average variable cost
q
is AV C(q) = 10 + (this is also the average avoidable costs in the short run). If the firm’s
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fixed costs are Rs 5000 and the market price is Rs 100, find the firm’s maximum profit. Will
it continue to operate in the short run?

3. John’s Lawn Moving Service is a small business that acts as a price taker (i.e., MR = P). The
prevailing market price of lawn mowing is $20 per acre. John’s costs are given by total cost
= 0.1q 2 + 10q + 50, where q = the number of acres John chooses to cut a day.

(i) How many acres should John choose to cut in order to maximize profit?

(ii) Calculate John’s maximum daily profit.

(iii) Graph these results.

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4. The production function for a firm in the business of calculator assembly is given by q = 2 l,
where q denotes finished calculator output and l denotes hours of labor input. The firm is a
price taker both for calculators (which sell for P ) and for workers (which can be hired at a
wage rate of w per hour).

(i) What is the total cost function for this firm?

(ii) What is the profit function for this firm?

(iii) What is the supply function for assembled calculators q(P, w)?

(iv) What is this firm’s demand for labor function l(P, w)?

5. Consider a city that has a number of hot dogs stands operating throughout the downtown
area. Suppose that each vendor has a marginal cost of $1.50 per hot dog sold, and no fixed
cost. Suppose the maximum number of hot dogs any one vendor can sell in a day is 100.

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 (i) If the price of a hot dog is $2, how may hot dogs does each vendor want to sell?

(ii) If the industry is perfectly competitive will the price remain at $2 for a hot dog? If not,
what will the price be?

(iii) If each vendor sells exactly 100 hot dogs a day and the demand for hot dogs from
vendors in the city is Q = 4400 − 1200P , how many vendors are there?

(iv) Suppose the city decides to regulate hot dog vendors by issuing permits. If the city
issues only 20 permits, and if each vendor continues to sell 100 hot dogs a day, what
price will a hot dog sell for?

(v) Suppose the city decided to sell the permits. What is the highest price a vendor would
pay for a permit?