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Econ301_review2

# Econ301_review2 - Econ 301 Intermediate Microeconomics...

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Econ 301 Intermediate Microeconomics Review Problem 2 July 26 - 2010 Jingbo Cui (ISU) Econ 301-Summer 2010 July 26 - 2010 1 / 17 The 2nd Midterm covers the following chapters: Ch.6 Firms and Production; Ch.7 Costs; Ch.8 Competitive Firms and Markets; Ch.9 Properties and Applications of the Competitive Model; Ch.11 Monopoly; Ch.12 Pricing and Advertising. For more details, please refer to the corresponding lecture slides. Jingbo Cui (ISU) Econ 301-Summer 2010 July 26 - 2010 2 / 17

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Problem 1 I The ﬁgure 1 shows a graph of cost curves for a competitive ﬁrm. Jingbo Cui (ISU) Econ 301-Summer 2010 July 26 - 2010 3 / 17 Problem 1 II Q: If the ﬁrm is to earn economic proﬁt, price must exceed? A: \$ 10. Q: The ﬁrm will incur economic losses if the price is less than? A: \$ 10 Q: If the market price is \$ 15 per unit, the ﬁrm will earn proﬁts of? A: \$ 160. Q: In the short-run, under what situation the ﬁrm would shut down? A: When price is below the minimum of AVC; Q: In the short-run, which part of curve is the ﬁrm’s supply curve? A: The short-run ﬁrm supply curve is the marginal curve above the AVC curve. Jingbo Cui (ISU) Econ 301-Summer 2010 July 26 - 2010 4 / 17
Problem 2 Suppose a ﬁrm has the following total cost function: TC = 100 + 4 q 2 . Q: What is the minimum price necessary for the ﬁrm to earn proﬁt? A: AC = 100 / + 4 q , MC = 8 q . This is minimized when MC = AC , solving yields q = 5 and AC = 40. Thus a price greater than \$ 40 is required for the ﬁrm to earn proﬁt. Q: Below what price will the ﬁrm shut down in the short run? A: AVC = 4 q and MC = 8 q . The minimum AVC is when MC = AVC , solving yields q = 0 and AVC = 0, AVC is below MC for all levels of output, AVC will be less than price for all levels of output. The ﬁrm will not shut down in the short run. Jingbo Cui (ISU) Econ 301-Summer 2010 July 26 - 2010 5 / 17 Problem 3 I The below ﬁgure shows supply and demand curves for milk. In an eﬀort to

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Econ301_review2 - Econ 301 Intermediate Microeconomics...

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