EC155C and D
Fall 2006
Problem Set 4, due on by 5:00 PM on Tuesday, November 21st, in the ‘class slot’ outside of Munroe 316. (All late problem sets will have four points deducted per day (e.g., if one day late, will go from a grade of 89 to 85.)
Chapter 10 (pp. 246 - 248)
Questions for Thought and Review, #4.
If production relationships were only technical relationships, diseconomies of scale would never occur because the same technical process could be used over and over again at the same cost. In reality, however, the social dimensions of production relationships introduce the potential for diseconomies of scale because, as the firm size increases, monitoring costs increase and team spirit or morale generally decreases.
Questions for Thought and Review, #7
No, not in the long run. In the long run you should not continue to produce at a loss, and since all inputs are variable you can get out of business. In the short run it depends on what portion of your costs are fixed.
Problems and Exercises, #2
a. Variable costs would likely include: Manufacturing labor and materials and possibly sales costs to the extent that they are for the sale of additional production. Certain other costs have a variable component to them, but they will unlikely vary directly with production.
b. Fixed costs would likely include: Factor overhead, operating expenses and profit, R&D, interest, and to some extent advertising. In the real world, the division between fixed and variable costs is not as clear-cut as in the texts.
c. If output were to rise, average total cost would likely fall because fixed costs seem relatively important. This is the case for many real-world firms.
Problems and Exercises, #3
- a. Ford was taking advantage of both economies of scope (combining production of different models to lower the cost of production for both) and economies of scale (increasing production of cars on one assembly line to lower average cost per unit).
- b. The plan shifted the average total cost curve down.
Problems and Exercises, #1
a. Given that this is a perfectly competitive firm. To maximize profits a competitive firm should produce where MR = MC (and MC are rising). This is between 4 and 5.
b. If the price of the good increased to $15, MR would also increase to $15, and the profit maximizing level of output would increase to between 5 and 6.
Problems and Exercises, #5
a. The market equilibrium price and the price that each firm gets for its product is $14.
b. The market equilibrium quantity is 50 units. Each firm produces 5 units.
c. Each firm is making $17 total profit.
d. Firms will begin to exit the market when the price falls below $9.75, the minimum average total costs.
Web Questions #2
One possible answer is, Vermont 7.5%; New Jersey 7.5%; California 6.64%; South Dakota 8.1%; Alabama 7.25%.
- a. 6.64%-8.1%, a wide range.
- b. Both buyers and sellers are price takers, there is a large number of firms, there is a homogeneous product, there are profit-maximizing entrepreneurial firms. It may appear that sellers are price takers because they are posting their rates, but they face many competitors. Their posted prices are set by the market. There is a lack of complete information and some barriers to entry (cost to establishing a lending institution).
c. Very few markets are perfectly competitive. Since the auto loan market doesn’t meet all six conditions, it isn’t surprising that there is a spread of loan rates.
Problems and Exercises, #1
Given the information in the problem, we can calculate:
Q |
P |
TR |
MR |
FC |
VC |
TC |
ATC |
2 |
12 |
24 |
24 |
20 |
6 |
26 |
13.00 |
3 |
11 |
33 |
9 |
20 |
9 |
29 |
9.67 |
4 |
10 |
40 |
7 |
20 |
12 |
32 |
8.00 |
5 |
9 |
45 |
5 |
20 |
15 |
35 |
7.00 |
6 |
8 |
48 |
3 |
20 |
18 |
38 |
6.33 |
7 |
7 |
49 |
1 |
20 |
21 |
41 |
5.86 |
8 |
6 |
48 |
-1 |
20 |
24 |
44 |
5.50 |
9 |
5 |
45 |
-3 |
20 |
27 |
47 |
5.22 |
10 |
4 |
40 |
-5 |
20 |
30 |
50 |
5.00 |
11 |
3 |
33 |
-7 |
20 |
33 |
53 |
4.82 |
12 |
2 |
24 |
-9 |
20 |
36 |
56 |
4.67 |
a. See accompanying graph.
b. The monopolist would produce where MR = MC, at 6 units of output.
c. A perfectly competitive firm would produce where P = MC, shown on the graph where demand crosses MC; thus at 11 units of output.
Problems and Exercises, #3
a. Wyeth-Ayerst Labs likely priced Norplant differently in the two countries because of the differing elasticities of demand for Norplant between the two. Charging more in the U.S. suggests that the elasticity of demand for Norplant is lower in the U.S. than in other countries.
b. Price discriminating due to differing elasticities is not inherently unfair. Such normative issues have many answers.
c. With such a large differential one would expect the two to converge. Specifically, as competition in the production of Norplant increases, the price of Norplant would be expected to decline in the U.S. Once the patent expires, the prices would converge at the zero-profit price.
Problems and Exercises, #4
Q |
P |
TR |
MR |
TC |
MC |
ATC |
0 |
4.20 |
0.00 |
|
3.20 |
|
|
1 |
3.80 |
3.80 |
3.80 |
4.20 |
1.00 |
4.20 |
2 |
3.40 |
6.80 |
3.00 |
5.60 |
1.40 |
2.80 |
3 |
3.00 |
9.00 |
2.20 |
7.80 |
2.20 |
2.60 |
4 |
2.60 |
10.40 |
1.40 |
10.40 |
2.60 |
2.60 |
5 |
2.20 |
11.00 |
0.60 |
13.40 |
3.00 |
2.68 |
6 |
1.90 |
11.40 |
0.40 |
16.80 |
3.40 |
2.80 |
a. Fixed cost is $3.20 per month per resident.
b. MC = MR at 3 collections per month. The price charged is $3 per pickup. Profit is 40 cents per pickup per person.
c. P = MC at 4 collections per month. The price charged would be $2.60 per pickup. There would be only normal profits. Economic profit would be zero.
d. The city government should prefer competitive bidding unless there is a natural monopoly. The quality of the pickup would be expected to be greater for the competitive industry because monopolists do not face competitors.