Assigned prob - chap 6-10 -- 7th edition

# Assigned prob - chap 6-10 -- 7th edition - Baye Solutions...

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Baye Solutions Chapters 6 – 10 : Chapter 6 – 4/. Engine manufacturing involves specific investments and a complex contracting environment. By vertically integrating, the potential for opportunism is reduced. Mirrors are relatively uniform products that can be purchased by spot exchange or contract. 12/. A contract decreases the problem of opportunism and still allows the firm to specialize in production. Chapter 8 – 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 long-run, 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 profit-maximizing 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. Unitary. 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 i i i MC q q = - + and 2 3 2 50 4 50 4 i i i i i i i q q q AVC q q q - + = = - + . Since MC and AVC are equal at the minimum point of AVC, set MC i = AVC i to get 2 2 50 8 3 50 4 i i i i q q q q - + = - + , or 2 i q = . Thus, AVC is minimized at an 1

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output of 2 units, and the corresponding AVC is ( 29 ( 29 2 50 4 2 2 46 i AVC = - + = . Thus the firm’s supply curve is described by
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## This note was uploaded on 12/03/2011 for the course MANEC 387 taught by Professor Crawford,l during the Fall '08 term at BYU.

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Assigned prob - chap 6-10 -- 7th edition - Baye Solutions...

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