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Managerial Economics and Business Strategy, 5e
Page 1
Chapter 8: Answers to Questions and Problems
1.
a.
7 units.
b.
$28.
c.
$224, since $32 x 7 = $224.
d.
$98, since $14 x 7 = $98.
e.
$126 (the difference between total cost and variable cost).
f.
It is earning a loss of $28, since ($28 $32) x 7 =  $28.
g.
 $126, since its loss will equal its fixed costs.
h.
Shut down.
2.
a.
Set P = MC to get $80 = 8 + 4Q. Solve for Q to get Q = 18 units.
b.
$80.
c.
Revenues are R = ($80)(18) = $1440, costs are C = 40 + 8(18) + 2(18)
2
= $832, so
profits are $608.
d.
Entry will occur, the market price will fall, and the firm should plan to reduce its
output. In the longrun, economic profits will shrink to zero.
3.
a.
7 units.
b.
$130.
c.
$140, since ($130 – 110) x 7 = $140.
d.
This firm’s demand will decrease over time as new firms enter the market. In the
longrun, economic profits will shrink to zero.
4.
a.
MR = 200 – 4Q and MC = 6Q. Setting MR = MC yields 200 – 4Q = 6Q. Solving
yields Q = 20 units. The profitmaximizing price is obtained by plugging this into
the demand equation to get P = 200  2(20) = $160.
b.
Revenues are R = ($160)(20) = $3200 and costs are C = 2000 + 3(20)
2
= $3200,
so the firm’s profits are zero.
c.
Elastic.
d.
TR is maximized when MR = 0. Setting MR = 0 yields 200 – 4Q = 0. Solving for
Q yields Q = 50 units. The price at this output is P = 200 – 2(50) = $100.
e.
Using the results from part d, the firm’s maximum revenues are R = ($100)(50) =
$5,000.
f.
Unit elastic.
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Michael R. Baye
5.
a.
A perfectly competitive firm’s supply curve is its marginal cost curve above the
minimum of its AVC curve. Here,
2
50 8
3
ii
i
M
Cq
q
=−
+
and
23
2
50
4
50
4
i
i
i
qq
q
AVC
q
q
q
−+
==
−
+
. Since MC and AVC are equal at the
minimum point of AVC, set MC
i
= AVC
i
to get
22
50 8
3
50
4
i
i
q
q
−
+=
−
+
,
or
2
i
q
=
. Thus, AVC is minimized at an output of 2 units, and the corresponding
AVC is
() ()
2
50
4 2
2
46
i
AVC
+
=
. Thus the firm’s supply curve is described
by the equation
2
3
8
50
i
i
q
q
MC
+
−
=
if
$46
P
≥
; otherwise, the firm produces
zero units.
b.
A monopolist produces where MR = MC and thus does not have a supply curve.
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 Spring '11
 zeng

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