ECO101_PS7-2013

# ECO101_PS7-2013 - MIDDLE EAST TECHNICAL UNIVERSITY NORTHERN...

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MIDDLE EAST TECHNICAL UNIVERSITY – NORTHERN CYPRUS CAMPUS ECO 101 (01, 02, 03) FALL 2013 PROBLEM SET 7 Chapter 9 Part A. Problems Q.1. For cases A through F in the following table, would you (1) operate or shut down in the short run and (2) expand your plant or exit the industry in the long run? A B C D E F Total revenue 4000 3000 5000 4000 5000 5000 Total cost 3000 3000 6000 5000 7000 4000 Total fixed cosst 1000 1000 1500 500 1500 1500 Q.2. Indicate whether you agree or disagree with the following statements. Briefly explain your answers. a) Increasing returns to scale refers to a situation where an increase in a firm’s scale of production leads to higher costs per unit produced. b) Constant returns to scale refers to a situation where an increase in a firm’s scale of production has no effect on costs per unit produced. c) Decreasing returns to scale refers to a situation where an increase in a firm’s scale of production leads to lower costs per unit produced. Q.3. You are given the following cost data: q TFC TVC 0 12 0 1 12 5 2 12 9 3 12 14 4 12 20 5 12 28 6 12 38 If the price of the output is 7 TL, how many units of output will this firm produce? Explain what the firm should do in the short and long run. 1

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Q.4. The following problem traces the relationship between firm decisions, market supply, and market equilibrium in a perfectly competitive market. a) Complete the following table for a single firm in the short run. Output TFC TVC TC AVC ATC MC 0 300 0 1 100 2 150 3 210 4 290 5 400 6 540 7 720 8 950 9 1240 10 1600 b) Using the information in the table, fill in the following supply schedule for this individual firm under perfect competition and indicate profit (positive or negative) at each output level. (Hint: at each hypothetical price, what is the MR of producing 1 more unit of output? Combine this with the MC of another unit to figure out the quantity supplied.) Price Quantity supplied Profit 50 70 100 130 170 220 280 350 c) Now suppose there are 100 firms in this industry, all with identical cost schedules. Fill in the market quantity supplied at each price in this market. Price Makert Quantity supplied Market Quantity demanded 50 1000 70 900 100 800 130 700 170 600 220 500 280 400 350 300 2
d) Fill in the blanks: From the market supply and demand schedules in c), the equilibrium market

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