Long Assignment 5 Answer Key

Long Assignment 5 Answer Key - ECON 256 Intermediate...

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ECON 256: Intermediate Microeconomics Long Assignment: 5 1 Answer Key Due Date: Tuesday, December 7, 2010 1. In the short-run marginal and average variable cost curves for a competitive firm are given by MC = 2 + 4Q and AVC = 2 + 2Q. How many units of output will it produce at a market price of $10? At what level of fixed cost will this firm earn zero economic profit? Setting price P = 10 equal to marginal cost of SMC = 2 + 4Q, solve for quantity 10 = 2 + 4Q or 8 = 4Q or Q = 2. The fixed cost that leads to zero economic profit is calculated by solving π = (P – AVC)*Q – FC = 0 or (10 – 6)*2 – FC = 0 for FC = 8. 2. A firm in a competitive industry has a total cost function of TC = 0.2Q 2 – 5Q + 30, whose corresponding marginal cost curve is MC = 0.4Q – 5. If the firm faces a price of $6, what quantity should it sell? What profit does the firm make at this price? Should the firm shut down? In equilibrium MC = P, which implies 0.4Q – 5 = 6, which solves for Q = 27.5. Profit = revenue – cost = 27.5*6 – [0.2(27.5) 2 – 5(27.5) + 30] = 121.25. Since the firm earns positive profit, it should stay open. 3. Assume the market for tortillas is perfectly competitive. The market supply and demand curves for tortillas are given as follows: Supply curve: P = 0.000002Q Demand curve: P = 11 – 0.00002Q The short run marginal cost curve for a typical tortilla factory is: MC = 0.1 + 0.0009Q
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