Problem 22-1
| 1. Use the following to calculate profit at each quantity |
| of output. |
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(Total) Output
(Q) |
Price
(P) |
Total
Revenue
(TR) |
Total Cost
(TC) |
Profit |
| 0 |
$1,900 |
$0 |
$1,000 |
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| 1 |
$1,700 |
$1,700 |
$2,000 |
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| 2 |
$1,650 |
$3,300 |
$2,800 |
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| 3 |
$1,600 |
$4,800 |
$3,500 |
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| 4 |
$1,550 |
$6,200 |
$4,000 |
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| 5 |
$1,500 |
$7,500 |
$4,500 |
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| 6 |
$1,450 |
$8,700 |
$5,200 |
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| 7 |
$1,400 |
$9,800 |
$6,000 |
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| 8 |
$1,350 |
$10,800 |
$7,000 |
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| 9 |
$1,300 |
$11,700 |
$9,000 |
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2. Use the table in exercise 1 to calculate marginal revenue and marginal cost.
3. Use the information in exercises 1 and 2 to graphically show maximum profit. Label the profitmaximizing quantity and price, total cost, total revenue, and profit.
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(Total) Output
(Q) |
Price
(P) |
Total
Revenue
(TR) |
Total Cost
(TC) |
| 0 |
$1,900 |
$0 |
$1,000 |
| 1 |
$1,700 |
$1,700 |
$2,000 |
| 2 |
$1,650 |
$3,300 |
$2,800 |
| 3 |
$1,600 |
$4,800 |
$3,500 |
| 4 |
$1,550 |
$6,200 |
$4,000 |
| 5 |
$1,500 |
$7,500 |
$4,500 |
| 6 |
$1,450 |
$8,700 |
$5,200 |
| 7 |
$1,400 |
$9,800 |
$6,000 |
| 8 |
$1,350 |
$10,800 |
$7,000 |
| 9 |
$1,300 |
$11,700 |
$9,000 |
| 5. Use the following information to calculate accounting profit and economic profit.
Sales $100 |
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| Employee expenses $40 |
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| Inventory expenses $20 |
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| Value of owner’s labor in any other enterprise $40 |
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(Total) Output
(Q) |
Price
(P) |
Total
Revenue
(TR) |
Total Cost
(TC) |
| 0 |
$1,900 |
$0 |
$1,000 |
| 1 |
$1,700 |
$1,700 |
$2,000 |
| 2 |
$1,650 |
$3,300 |
$2,800 |
| 3 |
$1,600 |
$4,800 |
$3,500 |
| 4 |
$1,550 |
$6,200 |
$4,000 |
| 5 |
$1,500 |
$7,500 |
$4,500 |
| 6 |
$1,450 |
$8,700 |
$5,200 |
| 7 |
$1,400 |
$9,800 |
$6,000 |
| 8 |
$1,350 |
$10,800 |
$7,000 |
| 9 |
$1,300 |
$11,700 |
$9,000 |
| 11. Use the information in the table to calculate total |
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| revenue, marginal revenue, and marginal cost. Indicate |
| the profit-maximizing level of output. If the |
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| price was $3 and fixed costs were $5, what would |
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| variable costs be? At what level of output would the |
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| firm produce? |
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| Output |
Price |
Total Costs |
TR |
MR |
MC |
| 1 |
$5 |
$10 |
$5 |
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| 2 |
$5 |
$12 |
$10 |
$5 |
$2 |
| 3 |
$5 |
$15 |
$15 |
$5 |
3 |
| 4 |
$5 |
$19 |
$20 |
$5 |
4 |
| 5 |
$5 |
$24 |
$25 |
$5 |
5 |
| 6 |
$5 |
$30 |
$30 |
$5 |
6 |
| 7 |
$5 |
$45 |
$35 |
$5 |
15 |
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| The profit maximizing level of output is at five units, where |
| marginal equals marginal cost. |
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| 1. Cost figures for a hypothetical firm are given in the |
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| following table. Use them for the exercises below. |
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| The firm is selling in a perfectly competitive market. |
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| Output |
Fixed
Cost |
AFC |
Variable
Cost |
AVC |
Total
Cost |
ATC |
MC |
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| 1 |
$50 |
$50 |
$30 |
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30 |
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| 2 |
$50 |
$25 |
$50 |
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20 |
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| 3 |
$50 |
$16.67 |
$80 |
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30 |
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| 4 |
$50 |
$12.50 |
$120 |
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40 |
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| 5 |
$50 |
$10 |
$170 |
$34 |
$220 |
$44 |
50 |
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| a. Fill in the blank columns. |
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| b. What is the minimum price needed by the firm |
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| to break even? |
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| c. What is the shutdown price? |
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| d. At a price of $40, what output level would the |
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| firm produce? What would its profits be? |
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| 14. Use the following data for the exercises below. |
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| Price |
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Quantity
Supplied |
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Quantity
Demanded |
| $20 |
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30 |
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0 |
| $18 |
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25 |
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5 |
| $16 |
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20 |
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10 |
| $14 |
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15 |
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15 |
| $12 |
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10 |
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20 |
| $10 |
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5 |
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25 |
| $8 |
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0 |
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30 |
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| a. What is the equilibrium price and quantity? |
| b.Draw the demand and supply curves. If this |
| represents perfect competition, are the curves |
| individual-firm or market curves? How is the |
| quantity supplied derived? |
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| c. Show the consumer surplus. Show the producer |
| surplus. |
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| d. Suppose that a price ceiling of $12 was imposed. |
| How would this change the consumer and producer |
| surplus? Suppose a price floor of $16 was |
| imposed. How would this change the consumer |
| and producer surplus? |
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6. In the following figure, if the monopoly firm faces ATC1, which rectangle measures total profit? If the monopoly firm faces ATC2, what is total profit?
What information would you need in order to know whether the monopoly firm will shut down or continue producing in the short run? In the long run?
8. Consider the following demand schedule. Does itapply to a perfectly competitive firm? Compute marginal and average revenue.
11. The cement industry is an example of an undifferentiated oligopoly. The automobile industry is a differentiated oligopoly. Which of these two is more likely to advertise? Why?
| 13. Use the payoff matrix below for the following exercises. |
| The payoff matrix indicates the profit outcome |
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| that corresponds to each firm’s pricing strategy. |
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Firm A’s Price |
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$20 |
$15 |
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Firm B’s
Price |
$20 |
Firm A earns $40
profit |
Firm A earns $35
profit |
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Firm A earns $40
profit |
Firm B earns $39
profit |
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$15 |
Firm A earns $49
profit |
Firm A earns $38
profit |
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Firm B earns $30
profit |
Firm B earns $35
profit |
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| a. Firms A and B are members of an oligopoly. |
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| Explain the interdependence that exists in oligopolies |
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| using the payoff matrix facing the two |
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| firms. |
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| b. Assuming that the firms cooperate, what is the |
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| solution to the problem facing the firms? |
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| c. Given your answer to part (b), explain why |
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| cooperation would be mutually beneficial and |
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| then explain why one of the firms might cheat. |
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