UNIT: COST ANALYSIS

Question 1:
Mr. X decides to start his own business after giving up his work as an assistant manager in a
multinational firm which was paying him Rs.2.4 Lakhs per annum. He invests his own savings
of Rs.150,000 into his business which was earning him an interest of 12% per annum. To avoid
rental costs he starts his business in his own garage which could have been on rent at Rs.5000
per month. He employs two workers with a salary of Rs.3000 each per month and spends
Rs.5000 per month on raw materials, Rs.3000 per month on utilities and Rs.1200 per annum on
advertising and insurance.
Calculate his economic costs and accounting costs for entire year and explain the difference
between the two concepts.

Question 2:
Total cost of production for a firm to produce 100 units is Rs 1500 and to produce 150 units
is Rs 2000. Assuming the average variable cost to be constant, find the fixed cost.
Explain the shape of the average cost curve in the short run.

Question 3:
Find out the missing values:
(ATC - also
Quantity TC (Rs.) MC (Rs.) written as AC) AVC (Rs.)
(Rs.)
0 20
1 20
2 10
3 16
4 20
5 24

Question 4:
The firm faces a choice between three scales of production:
Inputs
Capital Land Labour Output
SCALE A 5 3 4 100
SCALE B 10 6 8 300
SCALE C 15 9 12 500
If cost of each unit of capital, land and labour costs Rs.600, Rs.80 and Rs.200 respectively,
calculate the average cost of production for each scale. Why does average costs change when
scale of production changes? Explain the reasons for the same.

UNIT: PERFECT COMPETITION

Question 1:
Complete the below table and answer the following questions for a firm in a perfectly
competitive market:
Quantity Total Cost Marginal Cost
50 800
51 804
NUMERICALS 1
 52 810
53 818
54 828
55 840
56 854
57 872
58 892
a) If the industry is perfectly competitive and the market price is Rs 8 per unit, what is the
profit maximizing or loss minimizing level of output?
b) What is the economic profit/economic loss made by the firm?
c) If there are 5000 identical firms in the industry, what is the industry output?
d) If there is a rightward shift in the demand curve for the industry and the market price
increases to Rs. 18 per unit, what is the profit maximizing or loss minimizing level of
output?
e) Based on your answer in part d. what is the economic profit/economic loss made by the
firm?
f) Based on your answer in part d. what is the industry output if all 5000 identical firms
remain in the industry?

Question 2:
In a perfectly competitive industry the goods demand and supply functions are below:
D = 14000 – 500P
S = 8000 + 250P
The quantity and the costs of production for a firm in the industry are given below:
Quantity Total Cost
0 80
10 200
20 260
30 300
40 320
50 340
60 370
70 420
80 500
90 720
Calculate the following:
a) Calculate the equilibrium price for the industry
b) Total Revenue at each level of quantity produced
c) Economic Profit/Economic Loss at each level of quantity produced
d) Indicate the break-even points for the firm

Question 3:
The short run costs for different levels of output for a firm in a perfectly competitive industry
is given below, the price determined by industry demand and supply is Rs. 4
Quantity Total Cost
0 80
20 200
40 260
60 300
80 320
100 340
120 370
NUMERICALS 2
 140 420
150 460
160 500
180 720
Calculate the following:
a) Total Revenue at each stage of output
b) MR per unit at each level of output
c) MC per unit at each level of output
d) Determine the profit maximizing/loss minimizing level of output
e) The economic profit/economic loss at the point determined in part d.

UNIT: MONOPOLY
Question 1:
The below firm is a monopoly, complete the table for the same and answer the questions
below:
Quantity Price Total Revenue Average Marginal
Revenue Revenue
0 22
1 20
2 18
3 16
4 14
5 12
6 10
7 8
8 6
a) What is the profit-maximizing price for the monopoly firm if its marginal cost is 8 per
gallon.
b) What is the total revenue for the firm at this point
c) Assuming the ATC of the firm at this point is 10 per unit, calculate the total cost for the
firm
d) Calculate the economic profit for the firm at this profit-maximization point.

Question 2:
A monopolist practicing third degree price discrimination has segmented his market into
three segments with the following price elasticity of demand:
Market Price elasticity
A 1.5
B 2.5
C 4.0
If the monopolist is charging a price of Rs. 100 in market B and maximizing its profit, what
should be the profit maximizing price for market A and C.

UNIT: OLIGOPOLY
Question 1:
Based on the table below answer the following questions:
Firm Sales

NUMERICALS 3
 A 24,000
B 42,042
C 86,204
D 48,452
E 1,842
F 804
Total Sales 2,03,344
a) The value of the four firm concentration ratio
b) The value of the Herfindahl Index

Question 2:
Hari and Sadhu own the only water wells in town. They have to decide how much water to
bring to town to sell. (Assume that the marginal cost of each gallon of water is zero.)
The demand for the water is as follows:
Quantity Price Total Revenue (and Total Profit)
0 Rs.120 Rs. 0
10 110 1,100
20 100 2,000
30 90 2,700
40 80 3,200
50 70 3,500
60 60 3,600
70 50 3,500
80 40 3,200
90 30 2,700
100 20 2,000
110 10 1,100
120 0 0
Explain the price output determination under:
a) Perfect Competition
b) Monopoly
c) Collusion
d) Cartel

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NUMERICALS 4