UNIVERSITY OF GHANA BUSINESS SCHOOL

DEPARTMENT OF FINANCE UGBS 201- MICROECONOMICS

AND BUSINESS
TUTORIAL SET 6
Problem One
Sompa’s catering provides catered meals, and the catered meals industry is perfectly
competitive. Sompa’s machinery costs $100 per day and is the only fixed input. Her
variable cost consists of the wages paid to the cooks and the food ingredients. The
variable cost per day associated with each level of output is given in the
accompanying table.

Quantity of meals VC

0 $0

10 $150

20 $200

30 $480

40 $700

50 $1,000

a. Calculate the total cost, the average variable cost, the average total cost, and the
marginal cost for each quantity of output.

b. What is the break-even price? What is the shut-down price?

c. Suppose that the price at which Sompa can sell catered meals is $21 per meal. In
the short run, will Kate earn a profit? In the short run, should she produce or shut
down?
d. Suppose that the price at which Sompa can sell catered meals is $17 per meal. In
the short run, will Kate earn a profit? In the short run, should she produce or shut
down?

e. Suppose that the price at which Sompa can sell catered meals is $13 per meal. In
the short run, will Kate earn a profit? In the short run, should she produce or shut
down?

f. Suppose that the price at which Sompa can sell catered meals is $9 per meal. In
the short run, will Kate earn a profit? In the short run, should she produce or shut
down?

Problem Two
a) Firms like Papa’s Pizza and Pizza Hut sell pizza and other products that are
differentiated in nature. While numerous pizza chains exist in most locations, the
differentiated nature of these firms’ products permits them to charge prices above
the marginal cost. Given these above observations, is the pizza industry most likely
a monopoly, perfectly competitive monopolistically competitive or an oligopoly
industry? How will your answer change if “numerous” is interpreted to mean 10?

b) “A firm in perfect competition makes no economic profit in the long run”.

Discuss in no more than half a page.

c) Compare and contrast the short-run and long-run equilibrium facing a firm under
conditions of monopolistic competition.

d) State and explain five factors that give rise to firm’s market power?

Problem Three
Explain whether each of the following statements is true, false, or could go either
way, depending on the circumstances. If a question has more than one part, please
explain why each part is true, false, or uncertain. Use the analytical tools learned in
this course to back up your answers. EXPLANATION DETERMINES MARKS.

a) The long run average cost is U-shaped because of the law of diminishing returns

b) Since a monopolist faces a downward sloping-demand curve, it controls both

the price and the quantity demand.
c) When average total cost is rising, it is high below the marginal cost.

d) The vertical distance between the average total cost and the average variable cost
falls as output decreases because the average fixed cost declines when output
decreases

e) A monopolist can never make a loss because it is the only firm in the market.

f) In a perfectly competitive market, if firms are making profits in the short-run,

there will be fewer firms in the market in the short run than in the long-run.

Problem Four
Consider the total cost and total revenue given in the following table:
Total Total
Quantity cost Revenue
0 8 0
1 9 8
2 10 16
3 11 24
4 13 32
5 19 40
6 27 48
7 37 56

a) Calculate the profit for each quantity. How much should the firm produce to
maximize profit?

b) Calculate the marginal revenue and marginal cost for each quantity. Graph them.

c) Can you tell whether this firm is in a competitive industry? If so, can you tell
whether the industry is in a long-run equilibrium?

d) “On the basis of price changes, goods can be classified into normal and giffen
but on the basis of income changes, goods can be classified as normal and
inferior” with the aid of diagrams analyse this statement carefully.
Problem Five
Use the following pair of graphs, which illustrate the market for corn (which is used to produce
corn-based ethanol) and a representative firm, to answer the following questions. The first
diagram on the left panel is for the market while the diagram on the right is for a representative
firm in the market. Use the diagrams as the initial points.

MC
$ $

S1
ATC

P1 P1
D1=MR1=AR1=P1

D1

QM Quantity QF Quantity

a. Assume policymakers pass a law requiring that all gas sold in the united State contain at
least 10 percent corn-based ethanol. In the graphs above, illustrate the short-run effects of
this press release. In particular, show how the press release would affect
i. The short-run equilibrium curve in the market for corn
ii. The short-run demand curve faced by the representative firm, and
iii. The representative firm’s short-run profit-maximizing level of output.

Label the new curves and equilibrium values using a subscript 2. For instance the new market
demand should be labeled D2

b. Next, graphically illustrate how after the initial changes you illustrated, the corn market
and representative firm would adjust back to long-run equilibrium. Label any new curves
and equilibrium values using a subscript

c. After all adjustments have taken place, what has happened to the equilibrium market price,
the number of firms operating in the market, and the representative firm’s profit? Why?