ITE Assignment #3

Answer all questions briefly. Make graphs and tables where necessary. Document should be handwritten
and Submit on LMS by Sunday 5th November 11:55 PM.

Q1) Which of the following are short-run decisions and which are long-run decisions?

a. Royal Butch Shell acquires British energy supplier BG Group.

b. Germany decides to permanently shut down all nuclear reactors by 2022.

c. Madonna decides to add a second 2016 Hong Kong concert after an overwhelming response for the
first one.

d. HSBC announced it will lay off up to 50,000 employees by 2017.

e. Toyota plans to produce 1,000 hydrogen-powered cars in 2016.

f. Facebook decides in 2015 to move its UK headquarters from Euston to central London.

Q2) A firm’s costs are given in the following table.

a. Complete the table.

b. Graph AVC, ATC, and MC on the same graph. What is the relationship between MC and ATC and
between MC and AVC?
c. Suppose market price is $20. How much will the f irm produce in the short run? How much are total
profits?

d. Suppose market price is $60. How much will the firm produce in the short run? What are total profits?

Q3) a) Briefly explain why a firm in a perfectly competitive market would generally face a horizontal
demand curve. What implications do you think this has for the price of its product?

b) Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition
MR = MC is equivalent to the condition P = MC.

Q4) Use the following graph for Elijah’s Burgers to answer the questions.

a) If Elijah produces at the profit-maximizing level of output, how much is his total revenue? How much
is his total cost? Briefly explain your calculations.

b) How much economic profit is Elijah earning? Briefly explain your calculation.

Q5) a) What is the difference between zero accounting profit and zero economic profit?

b) What are the key factors that determine the profitability of a firm in a monopolistically competitive
market?
Q6) Bob and Tom are two criminals who have been arrested for burglary. The police put Bob and Tom in
separate cells. They offer to let Bob go free if he confesses to the crime and testifies against Tom. Bob
also is told that he will serve a 15-year prison sentence if he remains silent while Tom confesses. If Bob
confesses and Tom also confesses, they will each serve a 10-year sentence. Separately, the police make
the same offer to Tom. Assume that Bob and Tom know that if they both remain silent, the police have
only enough evidence to convict them of a lesser crime, and they will both serve 3-year sentences.

a. Use the information provided to write a payoff matrix for Bob and Tom.

b. Does Bob have a dominant strategy? If so, what is it?

c. Does Tom have a dominant strategy? If so, what is it?

d. What prison sentences do Bob and Tom serve? How might they have avoided this outcome?