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Assignment Questions

Q1

Mohamed produces Toys in the perfectly competitive Toys market.

Fill in the missing values in the following table: (5 marks)

Suppose the equilibrium price in the Toys market is $30. How many Toys should Mohamed produce? How much profit will he make? (1 mark)

If next week the equilibrium price of Toys drops to $15, should Mohamed shut down? Explain. (1 mark)

Output per week

Total Cost

FC

VC

AFC

AVC

ATC

MC

0

$100

1

150

2

175

3

190

4

210

5

240

6

280

7

330

8

390

9

460

10

540

Answer:

Q2

A publisher initially prices both hardback books and paperback books at $20 per book. The hardback version comes out first, followed two months later by the paperback version. The publisher initially sells the same number of hardbacks and paperbacks (100 each). Each book costs $2 to produce.

a.Complete the following table. (2 marks)

–

Price

Quantity

Total Revenue

Total Cost

Profit

Hardback

$20

100

Paperback

$20

100

Total

200

b. The price elasticity of demand for hardback (eager) buyers is 0.50, and the price elasticity of demand for paperback (patient) buyers is 2.00.Suppose the publisher increases the price for hardbacks by 10 percent and decreases the price of paperbacks by 10 percent. Complete the following table. (2 marks)

Price

Quantity

Total Revenue

Total Cost

Profit

Hardback

$22

Paperback

18

Total

c. Does price discrimination increase or decrease the publisher’s profit? (1 mark)

Answer:

Q3(3 marks)

Suppose a firm producing baseball, it is operating in the short run. The price of baseball is $5, the hourly wage is $12, and each baseball requires $1 worth of material. The firm has experimented with different workforces and the results are shown in the first two columns of the following table.

1. Fill in the blanks in the table.

2. Is it sensible to continue to operate at a loss with 14 workers?

3. Would it be better to operate with 15 workers? Explain, using the marginal principle.

Workers

Baseball

Labor Cost

Material Cost

Variable Cost

Total Revenue

Marginal

Cost

14

56

15

60

Answer: