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1)Based on your knowledge of the definition of the various measures of short-run cost, complete this table.QTCTFCTVCACAFCAVCMC0120[A][B]----1[C][D][E]265[F][G][H]AnswerQTC TFCTVCACAFCAVCMC0120A=120B=0----1C=265D=120E=145265F=120G=145 H=1452)Consider the following cost equation: Total Cost (TC) = 160Q -10Q2 + 1.2Q3. What is Total Cost when the Quantity is 20?Answer TC = 160Q -10Q2 + 1.2Q3TC = (160X20) – (10X202) + (1.2X203)TC = 3,200 – 4,000 + 9,600TC = 8,800 3)Which of the following represents the equation for the Average Cost (AC)?AC = 160 – 10Q + 1.2Q2AC = 160Q – 10Q + 1.2QAC = 80Q – 5Q2 + 0.6Q3AC = 53.3Q – 3.3Q2 + 0.4Q3AnswerAC = 160Q – 10Q + 1.2Q4)What is the Marginal Cost of producing the 21st unit? (Hint: Begin by calculating TC at 20 and at 21.) Round your answer to the nearest whole number.AnswerTC at 20 = 8,800TC at 21 = (160X21) – (10X212) + (1.2X213) = 10,063.2 = 10,063 (nearest whole number)MC = 10,063 – 8,800 MC= 1,2635)Questions 5 through 7 refer to the following graphical representation of a short-run situation faced by a perfectly competitive firm. Is this a good market for this firm to be in?Yes the firm should be here in the short run but in the long run it should leave.Yes the firm should be here in the short run and it should also stay in the long run.No; the firm should exit immediately.AnswerYes the firm should be here in the short run but in the long run it should leave.6)Refer to question 5. Which of the following describes the firm’s situation in the short run?The firm is breaking evenThere is a short run lossThere is a short run profitThe short run profit/loss situation cannot be determined from this graphAnswerThere is a short run Loss.7)Refer to question 5. What do you expect to happen in the long run?New firms will enter; short-run profits will disappearNew firms will enter; short-run losses will disappearSome existing firms will leave; short-run profits will disappearSome existing firms will leave; short-run losses will disappearAnswerSome existing firms will leave; short-run losses will disappear8)Questions 8 through 12 refer to the following scenario: The Automotive Supply Company has a small plant that produces speedometers exclusively. Its annual fixed costs are $30,000, and its variable costs are $10/unit. It can sell a speedometer for $25. How many speedometers must the company sell to break even?AnswerFixed cost = $30000Average variable cost = $10Price = $25Let ‘Q’ be the number of speedometers that this auto company needs to sell to break evenTotal revenue = 25QTotal cost = 30000+10QAt break even, total cost = total revenue 25Q = 30000+10Q, implies break even quantity Q = 30000/15 = 2000Hence the company must sell 2000 speedometers to break even.9)Refer to Question 8. What is the break-even revenue?AnswerTotal revenue at break-even = price X break even quantity = 2000 X 25 = $5000010)Refer to Question 8. The company sold 3,000 units last year. What was its profit?AnswerProfit = TR-TC = 25 X 3000 - 30000-10 X 3000 = $1500011)Refer to Question 8. Next year’s fixed costs are expected to rise to $37,500. What will be the break-even quantity?AnswerWith fixed cost of $37500, total cost becomes TC = 37500+10QAt break even, TR=TC25Q = 37500+10Q, implies Q = 250012)If the company will sell the number of units obtained in the previous question (number 11) and wants to maintain the same profit as last year, what will its new price need to be? Round your answer to the nearest whole number.Answer[Assuming the fixed cost is $30000]Profit required = $15000Quantity of speedometers= 2500We want profit = 15000 i.e. TR – TC = 15000 [when quantity is 2500] i.e.P X 2500 - 30000 – 10 X 2500 = 15000, This implies new price P = $28Questions 1 through 5 refer to the following scenario. Suppose three firms face the same total market demand for their product. This demand is:Price (P)Quantity (Q)$8020,0007025,0006030,0005035,000Suppose further that all three firms are selling their product for $60 and each has about one-third of the total market. What is the amount of total revenue each firm receives, in dollars?Total revenue = P*Q = 60*(1/3)*30000 = 60*10000 = $600,000Now assume that one of the firms, in an attempt to gain market share at the expense of the others, drops its price to $50. The other two quickly follow suit. What is the amount of total revenue each firm now receives, in dollars, rounded to the nearest dollar?Now, TR = P*Q = 50*(1/3)*35000 = 1750000/3 = 583333.33,i.e. TR = $583,333.What impact has the price drop had on the revenue of each firm?Each firm has less revenue.Each firm has more revenue.The price-dropper has more revenue and the others have less.The price-dropper has less revenue and the others have more.If the firms had all raised their prices to $70 instead of lowering price, what would be the amount of total revenue each firm would have received, in dollars, rounded to the nearest dollar?TR = P*Q = 70*(1/3)*25000 = 1750000/3 = 583333.33,i.e. TR = $583,333.Would the firms have been better off raising the price to $70, lowering to $50, or making no change?Raising to $70Lowering to $50Making no change (keeping price at $60) since TR decreases in either case.Questions 6 through 10 refer to the scenario that follows. A monopolistically competitive firm has the following short-run inverse demand, marginal revenue, and cost schedules for a particular product:P = $45 – $0.2QMR = $45 – $0.4QTC = $500 + $5QMC = $5What quantity would maximize profits for this firm? (Hint: Recall that profit maximizing is where MR = MC)The profit maximizing quantity is given by MR=MC,i.e. 45-0.4Q = 5,i.e. 0.4Q = 40,i.e. Q = 400/4 = 100.At what price should this firm sell its product?Given the demand curve we have, P = 45 – 0.2Q = 45 – 20 = $25.What would be the amount of the firm’s total revenue at the quantity and price identified in the prior two questions? TR = P*Q = 25*100 = $2500/What would be the amount of the firm’s profit (positive number) or loss (negative number) at the quantity and price identified in questions 6 and 7?Profit = TR- TC = 2500 -500 – (5*100) = $1500.What do you think would happen in this market in the long run?New firms would enter. Since the existing firms are earning positive profits, new firms will enter the market in the long run with free entry and exit, each new firm selling a closely differentiated product. This would reduce the demand curve faced by each of the existing firms. New firms enter till demand for each firm is such that the demand curve is tangential to its average cost curve at the profit maximizing price of each firm, i.e. in the long run each firm earns zero profits.Some existing firms would leave.Some existing firms would stay but no new firms would enter.There is not enough information to make this determination.Questions 11 through 13 refer to the scenario that follows. An amusement park, whose customer set is made up of two markets, adult and children, has developed demand schedules as follows:Price ($)Quantity, AdultsQuantity, Children51520614187131681214911121010101198128613741462The marginal operating cost of each unit of quantity is $5. (Hint: Because marginal cost is a constant, so is average variable cost. Ignore fixed cost.) The owners of the amusement park want to maximize profits. Calculate the price, quantity, and profit for each segment if the amusement park charges a different price in each market. (Hint: calculate profit at each price in the adult market, then in the child market, and choose profit maximizing in each. Using a spreadsheet would make this task manageable.)Adult market price (in dollars): [a] 12, 13 Adult market quantity: [b]8, 7Adult market profit (in dollars): [c] 56 Child market price (in dollars): [d] 10Child market quantity: [e] 10Child market profit (in dollars): [f] 50Total profit (adult + child, in dollars): [g] 106Calculate the price, quantity, and profit if the amusement park charges the same price in the two markets combined. (Hint: Add adult and child quantities together, and treat this total and the entire market quantity at each price.)Market price (in dollars): [a] 11Quantity (child + adult at this price): [b] 17Profit: [c] 102Is profit higher, lower, or the same when the market is split with different prices for adults and for children?Higher profit with split pricingLower profit with split pricingSame profit with split pricingCannot determine with the information availableQuestions 14 through 18 refer to the information that follows. Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sunday or whether it will close on that day. Monthly payoffs for each strategy pair are as shown in the table below.Which firm is the most profitable in this market?Gray (Profit is highest in every situation.)WhiteNeither – they are equally profitableNeither – there is no profit made by either firmWhat is White’s dominant strategy?Open SundaysClosed SundaysThere is no dominant strategyWhat is Gray’s dominant strategy?Open SundaysClosed SundaysThere is no dominant strategyWhat will be the likely equilibrium outcome, assuming no additional information is available to either firm?Both open SundaysBoth closed Sundays**White open Sundays, Gray closed SundaysWhite closed Sundays, Gray closed SundaysIs the position identified in question 17 the best possible outcome for both firms?Yes, the position identified in the previous question is the best outcome for both.No, it would be mutually advantageous to cooperate and choose a different outcome.Gray could do better, but White is already in the best position and would therefore need an incentive to cooperate.White could do better, but Gray is already in the best position and would therefore need an incentive to cooperate. ................
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