ECMA04H  VERSION A
Sketchy Solutions to Second Term Test, written on November 17, 2006
These are the answers to VERSION A.
Q1:
D
The
shut down price = minAVC;
AVC = TVC/q = .1q+6+14.4/q, which will
reach its minimum when dAVC/dq=0; dAVC/dq = .1  14.4q
2
= 0,
so
q = 12,
and min AVC = 1.2 + 6 + 14.4/12 = 8.4 or $8.40.
The correct answer is (D).
Q2:
A
The supply curve of the firm is given by its marginal cost curve, above AVC,
which is
P = .2q + 6, for all P >= $8.40;
since 500q = Q, industry supply
is
given by
P = .2(Q/500) + 6, or .0004Q + 6.
Set this equal to the industry
demand to find the SR equilibrium price, so
.0004Q + 6 = 36  .0008Q;
Q =
30/.0012 = 25,000;
P = 16.
The correct answer is (A).
Q3:
E
The individual firm’s output is
q = 25,000/500 = 50;
TC = 250 + 300 + 90 =
640;
TR = Pq = 800.
Therefore,
profit = TR  TC = $160.
The correct
answer is (E).
Q4:
G
Since this is a constant cost industry, its long run supply curve is horizontal at
long run min AC.
Min LRAC = $12, so the long run industry supply curve is P
= 12.
Therefore, we can find the long run equilibrium quantity where
$12 = 36
 .0008Q;
Q = 24/.0008 = 30,000.
The correct answer is (G).
Q5:
A
In the long run equilibrium, each firm must be at the most costefficient size,
which is 30 units of output.
We can find the number of firms in long run
equilibrium as
N = Q/q = 30,000/30 = 1000
(q is at minimum LAC).
The
correct answer is (A).
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 Spring '09
 Cleverland
 Monopoly, Supply And Demand, Correct Answer, shut down, Monopolists

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