Unformatted text preview: PRACTICE PROBLEMS ANSWERS: Econ 1, WINTER 2008 (1) $ MC ATC AVC AVC P=MR= AR $ MC ATC P = AR MR 0 Graph A Q 0 Graph B Q $ MC ATC $ MC ATC P=AR=MR AVC AVC P=AR MR 0 Graph C Q 0 Graph D Q ATC $ MC AVC P=AR=MR Graph E Instructions: Mark each statement true or false. In the space following the statement state briefly why you mark it as you do. False 1. The graph A producer is operating under competitive conditions in the short run and losing money. 2. Unless some adjustments take place, the graph A producer willnot operate in the long run. 3. The graph B producer is producing under monopolistic conditions and is losing money. 4. The graph C producer is operating under monopolistic conditions. True False True True 5. The graph C producer is operating at a profitable stage of operation. False 6. The graph D producer is producing under monopolistic conditions and is losing money. 7. The graph D producer is covering all fixed and variable costs. True False 8. The graph E producer is in the long-run equilibrium position. True 9. The graph E producer is operating under competitive conditions. True 10. The graph E producer is losing money. a. (2) Complete the following table for the various production levels; Q 0 1 2 3 4 5 6 7 8 9 10 P $10 9 8 7 6 5 4 3 2 1 0 TR $0 9 16 21 24 25 24 21 16 9 0 MR MC AVC ATC TC Profit 0r Loss $6 10 12 12 10 6 0 -8 -18 -30 9 7 5 3 1 -1 -3 -5 -7 -9 $3 3 3 3 3 3 3 3 3 3 $3 3 3 3 3 3 3 3 3 3 $3 3 3 3 3 3 3 3 3 3 $3 6 9 12 15 18 21 24 27 30 b. What level(s) of production will maximize profit of Widgets International? Q=4 Total Profit = $12 c. What are the values of MR and MC at the profit maximizing level(s) of production? MR = MC = $3 d. Suppose fixed costs become positive. How might this affect the profit maximizing production level? Explore different scenarios. No change in Q. Total profits at this level of output are reduced by an amount equal to the fixed costs. e. Suppose fixed costs remain zero, but that marginal and average costs rise to a higher constant level. How might this affect the profit maximizing production level? Explore different scenarios. fallen equilibrium Q. (3) a) b) The monopolist is in long run (short run, long run) equilibrium. At equilibrium the monopolist received a profit (profit, loss, break even) of $ 20 . If the monopolist acted in a purely competitive way in the long-run the equilibrium price would be $ 20 and quantity of output would be 25 . The pure competitor would receive a loss (profit, loss, break even) given the same cost and demand information. If government decides to regulate this firm (which again we will view as a monopolist) in the long-run in order to maximize the allocation of resources to society, the regulated price would be $ 20 and quantity produced would be 25 . This policy would yield a loss (profit, loss, break even) to the monopolist of $ 125 . Given the result in (c) above, the government might decide instead to use a fair-return pricing strategy. Under this scheme, the price would be set at $ 27 and quantity produced would be 21 . This policy provides the monopolist with a break even (profit, loss, break even) outcome. Should the government choose to subsidize the monopolist in order to provide the public with maximum output of the firm, the subsidy would be $5 per unit, or $125 total . The price under this scenario will be $ 20 and quantity produced will be 25 . c) d) e) (4) d (5) d (6) a (7) d (8) c (9) a (10) b (11) b ...
View Full Document
This note was uploaded on 04/16/2008 for the course ECON 1 taught by Professor Nagata during the Winter '08 term at UCLA.
- Winter '08