Wednesday
November 26, 2014

Homework Help: Economics

Posted by Mariah on Sunday, November 19, 2006 at 5:26pm.

1. Your roommate's long hours in chem lab finally paid off--she discovered a secret formula that lets people do an hour's worth of studying in 5 minutes. So far, she's sold 200 doses and faces the following average-total-cost schedule:
Q = 199 & ATC = $199
Q = 200 & ATC = 200
Q = 201 & ATC = 201

If a new customer offers to pay your roommate $300 for one dose, should she make one more? Explain.

Would the answer be yes because to produce one more would cost $202 which is less than the $300 the customer is willing to pay.

3. You go out to the best restaurant in town and order a lobster, you realize that you are quite full. Your date wants you to finish your dinner because you can't take it home and because "you've already paid for it" What should you do?

Isn't because I am full that the remaining amount of lobster is a sunk cost. So it is best to let it go and not eat it.

10. An industry currently has 100 firms, all of which have fixed cost of $16 and average variable cost as follows:
Quantity / Average variable cost: (1/$1),(2,$2), (3,$3), (4,$4), (5,$5), and (6,$6)
As this market makes the transition to its long-run equilibrium, will the price rise or fall? Will the quantity demanded rise or fall? Will the quantity supplied by each firm rise or fall?

1) She should produce whenever Marginal Revenue > Marginal cost. MR=300. What is Marginal Cost?

if Q=199 and ATC=199 then Total Cost TC = 199*199=39601.
When Q=200,ATC=200 then TC = 40000, Thus MC=40000-39601 = 399.
When Q=201,ATC=201 then TC=40401. Thus MC=401.
Now, what do you think the roomate should do?

3) I agree with your answer.

10) Good problem. First construct a marginal cost curve for a firm. (Same procedure as in 1 above).
Next, determine the break-even point for your firm. That is, at what price will the firm have zero net profits.

By my calculations, firms break even at P=$8. At P=8, each of the firms will produce 4 units. So, total revenue = 4*8=32. AVC=4*4=16 and fixed costs=16.

Your question says nothing about the current (short-run) price. So, lets assume. If Price < $8, then firms will be in a loss situation. Some will drop out, shifting the supply curve inward. Quantity demanded will fall, price will rise (to $8).
If Price > $8 then firms will enjoy an economic profit. More firms will enter (assuming they have the same cost structures). Supply shifts out, Price goes down, quantity demanded goes up, each firm's output will either fall are stay the same.

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