solutionsps5

# solutionsps5 - UNIVERSITY OF WISCONSIN Economics 101 Fall...

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UNIVERSITY OF WISCONSIN Economics 101 – Fall 2006 Problem Set 5 Suggested Solutions 1. a. The farmer’s marginal cost is 5. b. FC=100. c. VC (Q) = 5Q. d. ATC=5+100/Q and AVC = 5. e. 0 10 20 30 40 50 60 0 8 16 24 32 40 48 56 64 72 80 88 96 Q MC, ATC, AVC MC ATC AVC Notice in the graph below that as Q increases AFC (the difference between ATC and AVC) decreases. Finally, notice that these cost functions do not look like what we typically study in lecture or the textbook. These costs are a special case – one that we usually think of as representative of a natural monopoly (we’ll talk about this again in several weeks). For now, just notice that the graphs we see in lecture are probably more realistic, but that we used simpler form here to avoid some very complicated equations. 2. Question 3, page 254 in the book.

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a. The variable cost of producing an additional unit, marginal cost, is constant at \$500, so VC=500q. Fixed cost is \$5,000. Therefore, the total cost function is TC=500q+5000.
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