Emporia State University

School of Business
Fall 2017
BC 807 A
Homework 12 Total Points = 25

This Homework is due on Monday, November 13. No extensions will be granted and late
submissions will be penalized.

You should type all answers. Equations and graphs may be written/drawn by hand and
then scanned into your document. While you may discuss the homework with others, you
should write the answers by yourself. If two students submit identical (or largely similar
answers) both students will get zero points. Further penalties may apply. Your answers
must not be copied out of the textbook or from anywhere else, including the internet.
Copied assignments will be subject to sanctions, up to and including an administrative
withdrawal from the class.

1. (5 points) Assume that a health insurance company offers two plans:

(i) Plan A has a deductible of $4000. This means that consumers pay all health care costs
every year up to $4000 and the insurance company pays all the health care costs after that
point.
(ii) Plan B has a deductible of $750. Consumers pays all costs up to $750, and after that
point, the company will pay 80 percent of all costs and the consumer will pay 20 percent
of all costs.

(a) Which plan do you think will have a higher premium and why?
(b) Which plan would a consumer prefer and why? State any assumptions you make

2. (10 points) A firm uses a single plant

Total costs TC = 160 + 16Q + 0.1Q2
MC = 16 + 0.2Q
Demand curve is P = 96 – 0.4Q,
MR = 96 – 0.8Q

(a) What is the firm’s profit maximizing price and quantity when the firm uses one plant only?
Please show your calculations.
(b) What is the average cost minimizing quantity? Please show your calculations.
(c) Could the firm increase its profit by using a second plant (with costs identical to the first)? In
other words, the firm would produce the average cost minimizing output calculated in (b)
in each of the two plants; would this lead to higher profits? Please explain.
3. (5 points) Executives at Leonesse Celllars, a premium winery in Southern California, were
surprised to learn that shipping wine by sea to some cities in Asia was less expensive than
sending it to the East Coast of the United States, so they started shipping to Asia. Because of the
large U.S. trade deficit with major Asian countries, cargo ships arrive at West Coast seaports
fully loaded but return to Asia half to completely empty. Use the concept of opportunity cost to
help explain the differential shipping rates (why are the shipping rates to some cities in Asia
lower than the shipping rates within the U.S.). You must give an explanation.

4. (5 points) Complete the following table

Output Total Total Total Average Average Average Marginal

Cost Fixed Variable total cost fixed cost Variable Cost
Cost Cost Cost
0 125
10 5
20 10.50
30 110
40 225
50 3
60 3
70 5
80 295