ECO101A TUTORIAL PROBLEM SET 06 (SUMMER TERM 2018)

1. The short-run cost function of a company is given by the equation TC  200  55q, where
TC is the total cost and q is the total quantity of output, both measured in thousands.
a. What is the company’s fixed cost?
b. If the company produced 100,000 units of goods, what would be its average
variable cost?
c. What would be its marginal cost of production? What would be its average fixed
cost?
2. The firm’s cost function is C(q)  4q2  16.
a. Find variable cost, fixed cost, average cost, average variable cost, and average fixed
cost.
b. Show the average cost, marginal cost, and average variable cost curves on a graph.
c. Find the output that minimizes average cost.

3. Suppose you are the manager of a watch making firm operating in a competitive market.
Your cost of production is given by C  200  2q2, where q is the level of output and C is
total cost. (The marginal cost of production is 4q; the fixed cost is $200.).
a. If the price of watches is $100, how many watches should you produce to
maximize profit? What will the profit level be?
b. At what minimum price will the firm produce a positive output?

4. A competitive firm has the following short-run cost function: C(q) = q3 – 8q2 + 30q + 5.
a. Find MC, AC, and AVC and sketch them on a graph.
b. At what range of prices will the firm supply zero output?
c. Identify the firm’s supply curve on your graph.
d. At what price would the firm supply exactly 6 units of output?

5. Suppose that a competitive firm’s marginal cost of producing output q is given by MC (q)
 3  2q. Assume that the market price of the firm’s product is $9.
a. What level of output will the firm produce? What is the firm’s producer surplus?
b. Suppose that the average variable cost of the firm is given by AVC (q)  3  q.
Suppose that the firm’s fixed costs are known to be $3. Will the firm be earning a
positive, negative, or zero profit in the short run?

6. A firm’s long-run total cost curve is TC (Q) = 40Q −10Q2 + Q3. Over what range of
output does the production function exhibit economies of scale? Over what range does it
exhibit diseconomies of scale? At what quantity is minimum efficient scale?
 7. Suppose that a firm’s production function is q = 9x1/2 in the short run, where there are
fixed costs of $1000, and x is the variable input whose cost is $4000 per unit.
a. What is the total cost of producing a level of output q? In other words, identify the
total cost function C(q).
b. Write down the equation for the supply curve.
c. If price is $1000, how many units will the firm produce? What is the level of
profit?
8. Suppose an industry has 200 identical firms, each with the short-run supply curve :
P = 100+ 1000Qi .What is the short-run industry supply curve?
9. Suppose a firm’s short-run total cost curve is given by STC = 30Q2+ 25Q+15. What is
the equation for the firm’s short-run supply curve?

10. Consider a market composed of 10 identical firms, each with the cost curves given
below: TC = 100 + Q2. Assume the market demand curve takes the form: Qd = 100-20P

a. Derive short run firms supply curve.

b. What is the equilibrium price and quantity in this market? What quantity does each
firm produce?
c. What are profits for a representative firm? What would profits be if a representative
firm shut down?

11.Suppose that a firm’s total variable cost equation is: TVC =180Q -22Q2+Q3, where Q
represents units of output. Below what price should the firm shut down its operations?

12. The long-run average total cost (LRATC) equation of a perfectly competitive firm is:
LRATC =427 +3Q +0.001Q2, where Q represents units of output.
a. Determine the minimum efficient scale of production.
b. Calculate total cost at the minimum efficient scale of production.
c. If the total level of output in the industry is 150,000units, then how
many firms can profitably operate in this industry

11. Suppose that a competitive firm has a total cost function C(q)=450+15q+2q2 and a
marginal cost function MC(q)=15+4q. If the market price is P= $115 per unit.
a. Find the level of output produced by the firm.
b. Find the level of profit and the level of producer surplus.

12. A number of stores offer film developing as a service to their customers. Suppose that
each store offering this service has a cost function C(q)=50+0.5q+0.08q2 and
MC=0.5+0.16q.If the going rate for developing a roll of film is $8.50, is the industry in
long-run equilibrium? If not, find the price associated with long-run equilibrium.
 MULTIPLE CHOICE QUESTIONS: (Will be done by Students)

Choose the best alternative for the given questions:

1. Suppose the total cost to produce quantity q is TC(q) = 10 + q2/10, and hence, marginal
cost is MC(q) = q/5. If this firm is a price-taker and the market price is p = 10 and its
fixed cost is sunk, then the firm's profits will be:
a. 240
b. 260
c. 250
d. -10 because the firm will shut down.

The following 3 questions (Q.NO 2 -4) are about a perfect competitive market where each firm
has a cost function of C(y) = 10 + y2. There are 8 firms in this industry.

2. The firm supply for the firm is :

a. p = 10 + 2y
b. p = 2y
c. p = 10/y + y
d. p = y
3. The industry supply is equal to:
a. p = 4Y, where Y is the industry output
b. p = 16Y
c. p = Y/4
d. p = 8Y
4. Suppose now that the demand for the product in this industry is p = 100 - Y, where Y is
the industry output , the equilibrium price and quantity in this industry is equal to,
respectively:
a. $20; 80
b. $80; 20
c. $20; 20
d. $80; 80
5. Long-run ATC equals short-run ATC when:
a. Long-run MC equals short-run MC.
b. Long-run MC equals long-run ATC.
c. Short-run MC is minimized.
d. Short-run AVC equals long-run AVC.
e. Long-run ATC equals long-run AFC.
6. Perfect competition is characterized by:
a. Large number of firms; heterogeneous product; easy entry and exit.
b. Large number of firms; homogeneous product; incomplete information.
c. Large number of firms; homogeneous product; easy entry and exit.
 d. Few firms; homogeneous product; difficult entry and exit.
e. Few firms; differentiated product; easy entry and exit.
7. Firms in perfectly-competitive industries may be characterized as:
a. Price takers.
b. Price creators.
c. Price makers.
d. Price setters.
e. Price negotiators.
8. A firm operating in a perfectly-competitive industry faces a demand that is:
a. Vertical.
b. Horizontal.
c. Downward sloping.
d. Upward sloping.
9. To maximize profit, a perfectly-competitive firm should produce up to the output level
where
a. MR = MC.
b. P = MR.
c. P = MC.
d. P = ATC.
e. Both a and c.
10. A profit-maximizing perfectly-competitive firm will shut down when:
a. P < 0.
b. P < MC.
c. P < ATC.
d. P < AVC.