HW 5 answers - Economics 101-300 Winter 2006 Homework...

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Economics 101-300 Winter, 2006 Homework Problem Set # 9 Problems: 1) The cost schedule below shows the relevant costs of the “Fly-Out” Home Repair Services firm. ”Quantity” refers to the number of clients that employ the firm. Please fill in the blanks of the cost schedule so that “Fly-Out” can begin to figure out how many clients it should serve to maximize profits. Quantity (Number of Clients) TC ($) FC ($) VC ($) ATC ($) AVC ($) MC ($) 0 10 XXXXXX XXXXXX XXXXXX 1 20 2 17.5 3 19.66 4 11 ANSWER Quantity (Number of Clients) TC ($) FC ($) VC ($) ATC ($) AVC ($) MC ($) 0 10 10 0 XXXXXX XXXXXX XXXXXX 1 30 10 20 30 20 20 2 45 10 35 22.5 17.5 15 3 59 10 49 19.66 16.3 14 4 70 10 60 17.5 15 11 2) Here is an example of how a topic addressed in the previous question might be presented as a multiple choice problem: Assume that “Fly-Out” Home Repair Services firm is a profit-maximizing competitive firm and has decided to serve two clients. Using the information provided in the table above, what is the level of profits and what can the price be for this profit maximizing firm if it serves two clients? a) -$15, $14 b) -$15, $15 c) $0, $45 d) $0, $21.5 e) $5, $25
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Answer: B: a profit-maximizing competitive firm will choose a quantity of production so that price >= marginal cost. In this example, the firm has decided to serve two clients so price must be at least 15 (the marginal cost at this level). The formula for calculating profits is: Profits = total revenue(TR) - total costs(TC) Profits = price (P) * quantity (Q )- average total cost(ATC) * quantity(Q) Profits = (P-ATC) * Q. Therefore, for this firm the expected profits at an output of 2 clients is: (15*2 - 45) = -$15 (meaning that at this level of production this firm would incur a loss of $15 in the short run. 3) You operate Econsultants. One of your clients, Handspring, has recently decided to start a cell phone division in addition to producing handheld personal organizers,. Unfortunately, this division of the company is not doing as well as they had hoped and has asked you to assess whether or not they should continue to operate in the short run. The current market price for a cell phone is $100/phone and at this price, Handspring would like to supply 100 phones. However, at a quantity of 100 phones, Handspring has an ATC of $110/phone and an AVC of $75/phone. Starting a cell phone division involved many one-time costs (i.e. the building of factories).In the short run, would you suggest that Handspring continue to operate this division of the company? Explain your answer.
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