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Quiz5_F10_Key

# Quiz5_F10_Key - 60 3 4 260 50 4 5 300 40 5 6 330 30 6 440...

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3550 001 F10 Quiz 5 Last Name: _______ ___ First Name:_____________________ (True/False) 1.(2 points) The short run is any period of time less than one year, while the long run refers to a period of time one year or more in length. Explain your answer. False . It depends on the industry. In the long run, all inputs must be variable and in the short run, at least one input is fixed. In some industries, it is hard to change all input within one year (ex) car industry) while in other industries, it must be very flexible to catch up with the trend. (ex) fashion industry). There is no clear cut with the time frame itself. 2. (8 points) Assume Johnson’s Pink Slip Company (specializing in pink women’s undergarments) has the following demand and total cost structure. (Hint: use the extra columns to get the information you need to answer the question). Demand Cost Schedule P Q TR MR Q TC MC MC+tax 0 150 80 1 80 1 170 20 75 2 150 70 2 195 25 70 3 210
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Unformatted text preview: 60 3 230 35 65 4 260 50 4 280 50 60 5 300 40 5 350 70 55 6 330 30 6 440 90 a. What is the profit maximizing level of output this firm should produce? At Q=4, MR=MC=50, so Q=4 is the profit maximizing level of output. b. Should they consider shutting down? Why or why not? Profit=TR-TC=260-280= -20 For shut-down consideration, John has to compare TR and TVC. At Q=4, TVC=TC-TFC=280-150=130, so TR covers TVC. Therefore, this firm still operates with loss. c. If the firm's fixed costs rose by \$100, how will the higher costs affect the profit maximizing level of output in the short-run? The changes in fixed cost has no effect on the output decision in the short-run. d. Going back to the original cost numbers (as for a. and b.). Now consider an excise tax of \$25 per unit. Will this affect their profit maximizing level of output? If so, how? \$25 tax will increase MC by \$25. Therefore, new output level is Q=3 because MR=MC+Tax=35+25=60...
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