Q1. The questions below pertain to a firm in a competitive market.
a. Please complete the table below. Assume that the cost of a unit of labor is $2 and
that the factory cost $5. [3]
Total
Labor Output Variable Total Total
Input Cost Fixed Cost Cost
0 0
1 1
2 1.9
3 2.7
4 3.4
5 4
6 4.5
7 4.9
8 5.2
9 5.4
10 5.5
b. Does this production function exhibit diminishing marginal productivity? Justify
your answer. [1]
c. Assuming that same cost information supplied above, complete the table below.
[4]
Avera
Avera ge Avera
Total Total ge Variab ge Margi
Outpu Fixed Variab Fixed le Total nal
t Input Cost le Cost Cost Cost Cost Cost
0.00 0.00
1.00 1.00
2.00 2.12
3.01 3.42
4.00 5.00
5.00 7.30
d. What is the efficient scale for this firm? Why? Please explain. Any numbers you
quote can be a range. [2]
2. You are the manager at a bagel shop and must decide whether to open on
Sunday. Your lease of the space costs you $6,000 a month. (Assume there are 30
days in the month.) If you open on Sunday, you would sell 1,000 bagels at a price of
$.75 per bagel and 500 cups of coffee at a price of $1 per cup. The material (flour,
onions, raisins, etc.) for each bagel costs you $.20 and the material for the coffee
costs you $.30 per cup. To stay open on Sunday, you require 5 workers. Each
worker costs you $100 per day. Assume the utilities used on a Sunday costs you
$50. Should you open on Sunday?
Show your calculations. [5]
3. Use the following figure to answer this question.
a. Suppose the monopolist has constant marginal costs of production given by
MC = 20 and total costs given by TC = 20Q + 1000. Using this information
and the graph above, calculate the deadweight loss of the monopoly
compared to perfect competition. What is the source of this loss? [4+2]
b. Suppose now that the government decides to auction off a license to be the
monopoly provider of this good for one year. Using all the information given
above, decide how much this monopolist would be willing to pay for this
license. [5]
c. Suppose the government gives consumers the auction proceeds (you may
add this to their consumer surplus). Rank the following three choices (write
on the dashed line) according to consumers’ preferences, where 1 is the best
choice from the consumers’ point of view and 3 is the worst choice from their
point of view:
___ Firm is a monopoly
___ Market is perfectly competitive
___ Monopolist’s rights are auctioned off with consumers
receiving this payment.
Make sure you support your argument with a numerical analysis using the
information above and your answer for parts (a) and (b) [1+3]
End of chapter questions (I am putting the first few words down in case
your edition of the book is different)
Chapter 13
Q3. Nimbus Inc. makes brooms..
Q9. The city government is considering a lump-sum tax
Chapter 14
Q4. Ball Bearings….
Q5. Consider total cost and revenue given in the following table…
Q9. A profit-maximizing firm in a perfectly competitive market..
Chapter 15
Q3. A company is considering building a bridge..
Q4. Johnny Rockabilly…
Q11. Many schemes for price discriminating involve..
