Consider a profit maximizing firm that manufactures ball point pens in a competitive market. We will assume that this firm has a small amount of fixed cost ($75) which it must incur regardless of the level of production. The variable cost, consisting of materials and labor, changes along with production levels.

 

 

Please fill in the entries in the following cost table:

 

 

                      Total       Total                                 Average     Average     Average

 

Production            Variable    Fixed     Total   Marginal    Total        Variable        Fixed

 

Quantity        Cost        Cost       Cost      Cost         Cost            Cost          Cost

 

    (pens)          ($)           ($)         ($)      ($/pen)     ($/pen)       ($/pen)___($/pen)

 

      0                 0          $75         $75                       ------          ------           ------

 

                                                                  ____

 

    30               60          ____      ____                     ____          ____          ____

 

                                                                  ____

 

    90             120          ____       ____                     ____          ____          ____

 

                                                                  ____

 

130             180          ____      ____                      ____          ____          ____

 

                                                                  ____

 

155             240          ____      ____                      ____          ____          ____

 

                                                                  ____

 

172             300          ____      ____                      ____          ____          ____

 

                                                                  ____

 

185             360          ____      ____                      ____          ____          ____

 

 

 

1. (6 points) Show the MC, ATC, AVC, and AFC curves on a graph. Identify the minimum AVC and ATC. (A hand drawn graph is fine as long as it is legible.)

 

 

Hint: Note that the marginal cost is shown between two production quantities. You should plot this MC at the midpoint of each quantity range. For example, for the MC between the first two quantities, plot your value at Q = 15.

 

 

1. (2 points) If the equilibrium price in the market for ball point pens is $1.75, will this firm choose to operate in the short run?   Explain why or why not.

 

 

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1. (2 points)   If the equilibrium price in the market for ball point pens falls to $1.25, what will the firm choose to do and why?

 

 

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1. (5 points) Now consider a monopolist in the market for a patent-protected energy drink. Given the following demand schedule, please calculate total revenue and marginal revenue at each of the prices listed in the schedule.

 

 

                  Product           Quantity          Total        Marginal

 

                     Price           Demanded        Revenue      Revenue

 

                      ($)               (drinks)               ($)           ($/drink)

 

                  $10.00                 0                     0

 

                                                                                        _____

 

                  $ 8.00               30                _____

 

                                                                                        _____

 

                  $ 6.00               60                _____

 

                                                                                        _____

 

                  $ 4.00               90                _____

 

                                                                                        _____

 

                  $ 2.00           120                _____

 

                                                                                        _____

 

                  $ 0.00           150                _____

 

 

Note that the marginal revenue is also shown between the two production quantities.

 

 

1. (5 points) Show the demand curve and marginal revenue curve on a graph.   

 

 

   Hint: plot the marginal revenue between each pair of quantities (like MC earlier)

 

 

1. Suppose the marginal cost for producing this drink is constant at $4.00 per unit.

 

 

(2 points) Add this MC curve to your graph from question #6.

 

 

(4 points) What quantity will our monopolist choose to make to maximize profits, and what price will it charge?

 

 

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(4 points) Had our market been in perfect competition, what would the equilibrium price and quantity have been?

 

 

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