PROBLEM SET 7

# PROBLEM SET 7 - PROBLEM SET 7 Perfect Competition...

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PROBLEM SET 7 Perfect Competition Department of Economics Professor William J. Stull Temple University Economics 1902 A. Haircuts The haircut industry in Seville is perfectly competitive. The daily short run total cost (TC) schedule for Figaro's Barber Shoppe, one of the firms in the industry, is given in columns 1 and 4 of Figure A for output levels from 0 to 5. 1. Fill in the missing numbers in the table (marked with >). 2. Plot the average variable cost (AVC) curve in Figure B. (This relationship will not have the "standard" U shape.) 3. Plot the average total cost (ATC) curve in Figure B. 4. Plot the marginal cost (MC) curve in Figure B. Remember to locate each marginal cost value at the midpoint between the two relevant output quantities. (This relationship will pass through the minimum point of the ATC curve but will not be U-shaped.) 5. In 1997 the equilibrium haircut price in Seville was \$55. Draw Figaro's marginal revenue (MR) curve for this year in Figure B. 6. Using your diagram, determine Figaro's profit-maximizing level of (daily) output (Q*). __________ 7. What was its total revenue at Q*? __________ 8. What was its total cost? __________ 9. What was its profit ? __________ 10. Label the area in your diagram corresponding to Figaro's total cost with a "TC." Label the area corresponding to its profit with a " ." 11. Using your diagram, determine (approximately) Figaro's breakeven price. __________

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Figure A (1) (2) (3) (4) (5) (6) (7) (8) Quantity of Output (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC) Average Fixed Cost (AFC) Average Variable Cost (AVC) Average Total Cost (ATC) Marginal Cost (MC) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 0 > > 40 -- -- -- > 1 > > 60 > > > > 2 > > 90 > > > > 3 > > 130 > > > > 4 > > 180 > > > > 5 > > 240 > > >
Figure B

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12. In 1998 market price fell to \$25.
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PROBLEM SET 7 - PROBLEM SET 7 Perfect Competition...

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