Name: Maaz Ali (10564)

Course: MicroEconomics

ASSIGNMENT

ANSWER # 01

PART A)

The Boat’s market is given. The rise in the price of crude oil will increase the average total cost
and the average variable cost in the short run. The graph of the cost curves is shown below
From the above the graph , there is an upward shift in SATC to SATC1, due to rise in the crude
oil price. The market supply declines due to an increase in the SATC from S to S1.

PART B)

The boat maker’s profit will fall in the short run because of a rise in SATC. In the long run, the
number of boat-makers will decrease due to having less profit. The number of boat-makers will
decrease in the long run. As a result, the price will decrease from OP to OP’.

ANSWER # 03

PART A)

The firm should produce 5 or 6 units to maximize profit since TR – TC is largest (40-
19=21, 48-27=21) at both 5 and 6.

PART B)
Marginal revenue and marginal cost are graphed in Figure above. The curves cross at a quantity
between 5 and 6 units, giving the same answer as given in part a.

PART C)

This industry is competitive since marginal revenue is the same for each quantity. The industry
is not in long-run equilibrium, since profit is positive.

ANSWER # 04
PART A)

Quantity Total Fixed Total Average Average Average Marginal

costs Variable Fixed Costs Variable Total Costs Costs
Costs Costs

0 $100 $0 -(100) - -(100)

1 100 50 100 50 150 50
2 100 70 50 35 85 20
3 100 90 33.333 30 63.333 20
4 100 140 25 35 60 50
5 100 200 20 40 60 60
6 100 360 16.667 60 76.667 160

PART B)

If the price is $50, the firm will minimize its loss by producing 4 units, where price is equal to
marginal cost. When the firm produces 4 units, its total revenue is $200($50 x 4=$200) and its
total cost is $240($100 divide $140). This would result in the loss of $40 for firm. If the firms
shut down, it will earn a loss equal to its fixed cost($100). It was not a wise decision by the CEO.

PART C)

If the firm produces 1 unit, its total revenue is $50 and its total cost is $150 ($100divide $50),
so its loss will still be $100. This was also not the best decision. The firm could have reduced its
loss by producing more units because the marginal costs of the second and third unit are lower
than the price.

ANSWER # 05

PART A)

In graph, LRAC is long run average cost curve SRAC is short run average cost curve MC is
marginal cost curve Note that the marginal revenue is equal to price and in long run
equilibrium, price is lowest point on long run average cost curve.
The supply curve of a firm is portion of marginal curve.
PART B)

The decrease in cost shifts marginal cost and average cost curve downward. Since there is
perfect competition in market, the market supply curve would remain unchanged. As a result,
market price remains unchanged. In this way, the profits of Hi-Tech Printing Company
increases.
PART C)
When patent expires, there would be no entry barrier. The organizations would work at
proficient level and new firms would continue entering till price falls to average at cost efficient
scale of operation. Thus, in equilibrium, firms make zero profit.