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Assignment Questions

Q1

Mohamed produces Toys in the perfectly competitive Toys market.

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

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

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

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

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

Total200

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: