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K
K
K
0
1
x=100
x=200
A
B
C
D
Intermediate Microeconomics  Wissink
BRIEF ANSWERS TO PROBLEM SET #5
1
a.
Not necessarily.
Must also check 2ndorder condition (that mc cuts mr from below) and shutdown
condition (that p
$
sravc in shortrun or p
$
lratc in longrun).
b.
Not necessarily  could be that at mr = srmc, p < sratc, but p > sravc.
In shortrun you would still
produce in order to minimize losses.
c.
Not necessarily. If implicit costs are large enough then it could be that accounting profit > 0 while
economic profit < 0.
d.
False.
Remember profit = 0 is
economic
profit, which includes as a cost the opportunity cost of
owners time, labor and resources, etc.
e.
Dumb statement.
Want to cost minimize at every level of output in order to profit maximize.
f.
Not necessarily.
Some fixed costs may be avoidable through resale, subletting, etc., and therefore not
sunk, or not fully sunk.
2.
cost curves.
curve  drawn assuming you have K
0
capital.
curve  drawn assuming you have K
1
capital.
Points A and B are on the lratc and on the lrtc curves.
SUGGESTION:
Try drawing the average total cost curve
picture.
It should have one lratc curve and two sratc curves.
3a. tc
i
= x
i
2
+ 10x
i
=> mc
i
= 2x
i
+ 10
Profit maximizing firms => mr = mc at x
*
Perfectly competitive firms => p = mr at x* and all other values of x
So we get p = mc => p = 2x + 10
=> x
S
= (1/2)p  5 (srs firm)
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With 1000 identical firms, then X
S
=  5000 + 500p (SRS market)
If p = 20 => X
S
= 5,000
If p = 21 => X
S
= 5,500 => 500 more
b.
demand:
p = 40  (1/250)X => X
D
= 10,000  250p.
Now set D = S => 10,000  250 p =  5000 + 500p
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 Fall '06
 MASSON

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