ps8ans - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005...

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UNIVERSITY OF WISCONSIN Economics 101 – Fall 2005 Wei Zhang Problem Set 8 – ANSWER KEY Perfect Competition (Chapter 14) 1) A local microbrewery has total costs of production given by the equation TC=50+10Q+5Q 2 . This implies that the firm's marginal cost is given by the equation MC = 10 + 10Q (you do not need to be able to show this). a. ATC = TC/ Q = (50 + 10Q + 5Q 2 )/Q = 50/Q + 10 + 5Q. AVC = VC/Q = (10Q + 5Q 2 )/Q = 10 + 5Q. b. Notice that MC cost cuts ATC at it’s minimum, and that ATC is approaching AVC as Q increases (This is because AFC = 50/Q, the difference between ATC and AVC is decreasing as Q increases.)
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c. In long run equilibrium, there must be zero profits. Therefore, rewriting the profit function, π = TR – TC = P*Q – ATC*Q = (P – ATC) * Q we can see that zero profit requires that P = ATC. Since in perfect competition it is always the case that P = MC for a profit maximizing firm, we need to find the price at which MC = ATC. To do this, use the
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This note was uploaded on 07/28/2010 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at University of Wisconsin.

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ps8ans - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005...

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