Week 6 Assignment – Chapters 14 & 15

Class, below you will see a total of ten questions. Some questions may have you do the
following – select from a drop-down menu, check a box(es), or require you to type in
your response. If you prefer to write your answer on a different sheet of paper that is
also acceptable.
The course assignment was completed using Microsoft Word. If you do not have
Microsoft Word then write your answers on a separate sheet of paper. For those who
choose to use the document to select your answers you MUST convert to PDF to save
the answers. Assignments which are not saved in PDF will not save properly and no
extensions will be provided.

1.
Bob's lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for
$30 each. His total cost each day is $320, of which $70 is a fixed cost. He mows 10
lawns a day.

In the short run, Bob should . In the long run, Bob should
the industry.
2.
Consider total cost and total revenue, given in the following table:

In the final column, enter profit for each quantity. (Note: If the firm suffers a loss, enter a
negative number in the appropriate cell.)

QUANTITY TOTAL MARGINAL TOTAL MARGINAL PROFIT

COST COST REVENUE REVENUE
0 6 0
1 8 7
2 10 14
3 13 21
4 17 28
5 24 35
6 32 42
7 42 49
In order to maximize profit, how many units should the firm produce? Check all that
apply.

3
4
5
6

The marginal-revenue curve and the marginal-cost curve cross at a quantity UNIT 4,
UNIT 5 OR BETWEEN 4 AND 5 UNITS.

This firm IS OR IS NOT in a competitive industry, because marginal revenue is

CONSTANT, INCREASING OR DECREASING as quantity increases.

True or False: The industry is in a long-run equilibrium.

True
False

3.
Short Run

Suppose the book-printing industry is competitive and begins in a long-run equilibrium.

Then Hi-Tech Printing Company invents a new process that sharply reduces the cost of
printing books.

Suppose Hi-Tech's patent prevents other firms from using the new technology.

Which of the following statements are true about what happens in the short run? Check
all that apply.

Hi-Tech's marginal-cost curve remains the same.

Hi-Tech's average-total-cost curve shifts downward.

Hi-Tech's profits increase.

The price of books remains the same.

Long Run
Suppose the book-printing industry is competitive and begins in a long-run equilibrium.
Then Hi-Tech Printing Company invents a new process that sharply reduces the cost of
printing books.

Now suppose the patent expires and other firms are free to use the technology.
Which of the following statements are true about what happens in the long run? Check
all that apply.

All firms earn zero profit.

All firms' average-total-cost curves decline.
The market price falls.

4.
A firm in a competitive market receives $1,200 in total revenue and has marginal
revenue of $20.

The firm's average revenue is , and units were sold.

5.
A profit-maximizing firm in a competitive market is currently producing 90 units of
output. It has average revenue of $6, average total cost of $6, and fixed cost of $270.

Complete the following table by indicating the firm's profit, marginal cost, and average
variable cost.
Profit Marginal Cost Average Variable Cost

(Dollars) (Dollars) (Dollars)

The efficient scale of the firm must be 90 units.

6.
Johnny Rockabilly has just finished recording his latest CD. The company can produce
the CD with no fixed cost and a variable cost of $7 per CD. His record company's
marketing department determines that the demand for the CD is as follows:

Complete the following table by computing the total revenue for each quantity listed and
marginal revenue for each 1,000 increase in the quantity sold.
PRICE # OF CD’s TOTAL REVENUE MARGINAL
REVENUE
25 12000
24 13000
23 14000
22 15000
21 16000
20 17000

Profit is maximized at a quantity of CDs and a price of .

This results in a profit of .

If you were Johnny's agent, you would advise Johnny to demand a recording fee of
from the record company.

7.
A monopolist, unlike a competitive firm, has some market power. It can raise its price,
within limits, without the quantity demanded falling to zero. The main way it retains its
market power is through barriers to entry—that is, other companies cannot enter the
market to create competition in that particular industry.

Complete the following table by indicating which barrier to entry appropriately explains
why a monopoly exists in each scenario.

Barriers to Entry

Exclusive
Ownership Government-
of a Key Created Economies
Scenario Resource Monopolies of Scale

The Aluminum Company of

America (Alcoa) formerly
controlled all U.S. sources of
bauxite, a key component in the
production of aluminum. Given
that Alcoa did not sell bauxite to
any other companies, Alcoa was a
monopolist in the U.S. aluminum
industry from the late 19th century
until the 1940s.

In the natural gas industry, low

average total costs are obtained
only through large-scale
production. In other words, the
initial cost of setting up all the
necessary pipes and hoses makes
it risky and, most likely,
unprofitable for competitors to
enter the market.

At the national level, the Federal

Communications Commission
 Barriers to Entry

Exclusive
Ownership Government-
of a Key Created Economies
Scenario Resource Monopolies of Scale

licenses only a certain number of

radio and television stations in
each geographic area.

8.
Complete the following table by indicating whether or not each scenario is an example
of price discrimination.

Hint: To determine whether a scenario is an example of price discrimination, think about

whether the market can be segmented into two groups that pay different prices for the
same good.

Price
Discrimination

Scenario Yes No

Every year, Lesspay ShoeSource promotes its giant BOGO sale

—buy one pair of shoes and get one half off—through
commercials and other means of advertising. Note that the price
of one pair of shoes is the regular retail price, so a customer
must buy two pairs of shoes to receive the discount.

Most restaurants will supply a free dessert if it is the customer's

birthday. Assume that this is not specifically advertised by
restaurants.

9.
Suppose that there is only one provider of a service in a state. Because this provider
experiences economies of scale, the government does not want to break it into smaller
pieces, but it does want the provider to supply the efficient quantity.
 Which of the following policy options might most effectively enable the government to
achieve its objectives in this situation?

Regulate the firm's pricing behavior.

Turn the company into a public enterprise.

Do nothing at all.

Use antitrust laws to increase competition.

10.
The model of competitive markets relies on these three core assumptions:

1. There must be many buyers and sellers—a few players can't dominate the market.

2. Firms must produce an identical product—buyers must regard all sellers' products as
equivalent.

3. Firms and resources must be fully mobile, allowing free entry into and exit from the
industry.

The first two conditions imply that all consumers and firms are price takers. While the
third is not necessary for price-taking behavior, assume for this problem that a market
cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a competitive market,
along with the correct explanation of why or why not. For each problem below, choose
the correct response from the four below.

Yes, meets all assumptions

No, no free entry

No, not many sellers

No, not an identical product

Scenario Competitive?
A few major airlines account for the vast majority of air travel.
Consumers view all airlines as providing basically the same
service and will shop around for the lowest price.
Scenario Competitive?
There are hundreds of colleges that serve millions of
students each year. The colleges vary by location, size, and
educational quality, which enables students with diverse
preferences to find schools that match their needs.

Dozens of companies produce plain white socks. Consumers

regard plain white socks as identical and don't care who
manufactures their socks.

The government has granted a patent to a pharmaceutical

company for an experimental AIDS drug. That company is
the only firm permitted to sell the drug.