ps6x101_s03_answer - f. Suppose that the price of CD...

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Econ 101 – Spring 2003 PS#6-XtraQ ANSWERS a. Since Acme is a price taker marginal revenue = P*=$5. b. We do not know the lowest price at which Acme will supply in the short run. We need the average variable cost curve to determine the lowest price at which Acme will operate in the short run. c. Complete the remaining entries in the following table: Output (x) Acme's Marginal Revenue Acme's Marginal Cost Acme's Total Revenue Acme's Total Cost Acme's economic Profit 50 5 2 250 100 150 90 5 5 450 270 180 100 5 6 500 450 50 d. What is Acme's profit maximizing level of output at the current market price? Set mr=mc and get x*=90. At this quantity, what is the relationship between Acme's price and its marginal cost? P=mc at x*. e. Suppose that Acme's fixed costs increase. What impact will this have on Acme's profit maximizing level of output in the short run (relative to that found in part d.)? It will have NO impact. Nothing marginal would change so the point where mr=mc is the same. However, short run economic profit will be reduced if we increase fixed costs.
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Unformatted text preview: f. Suppose that the price of CD players (a complementary good) decreases. How, if at all, does this change influence Acme's profit maximizing quantity in the short run (relative to that found in part d.)? If the price of CD players increases it will reduce the market demand for CDs. Therefore the market price of CDs will fall. Acme would have to re-profit maximize with this new market price - which is now its relevant demand and marginal revenue. Acme's quantity supplied will fall and so will Acme's profits. Now let's answer it the way it was asked. ...oops. ... .)? If the price of CD players decreases it will increase the market demand for CDs. Therefore the market price of CDs will rise. Acme would have to re-profit maximize with this new market price - which is now its relevant demand and marginal revenue. Acme's quantity supplied will increase and so will Acme's profits. 50 90 100 2 6 sratc $ srmc x 3 mr=$5 5...
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