BECN 150 - Assignment No. 2, Nov. 29, 2020 - Fall 2020 PDF

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BECN 150 ONA - MicroeconomicsAssignment No. 2: 70 Marks - 10%, Revised to November 29, 2020(Submit at beginning of class)Question 1 – 12 MarksA firm in perfect competition has cost curves as shown in the diagram below.a) Calculate the following: 12 Marks (2 each) (1) AVC at 6,000 units is $4. (2) AT...

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BECN 150 ONA - Microeconomics Assignment No. 2: 70 Marks - 10%, Revised to November (Submit at beginning of class)

29, 2020

Question 1 – 12 Marks A firm in perfect competition has cost curves as shown in the diagram below.

a) Calculate the following: 12 Marks (2 each) (1) AVC at 6,000 units is $4.00. (2) ATC at 6,000 units is $5.50. (3) AFC at 6,000 units is $1.50. (4) TVC at 6,000 units is $24,000 ($4.00 x 6,000). (5) TFC at all levels of output is $9,000. (6) TC at 6,000 units is $90,00

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Question 2 – 13 Marks The firm is operating in a perfect competition market. Based on the diagram below complete the questions in Parts 1, 2, and 3.

Part 1 a) At a market price of $7 what is the Marginal Revenue for this firm? At a price of $7, the marginal revenue MR =$7 b) At a market price of $7 what is the Average Revenue for this firm? In perfect competition, marginal revenue MR = average revenue AR = Price c) At a price of $7 how many units will this firm produce in the short run to maximize profit? (Round off your answer to the nearest 100 units) The output volume to maximize profit is where MR = MC. Q = 6,500 d) What is the cost per unit? (See ATC) The average cost ATC = $5.50 per unit. e) What will be its profit or loss per unit? The average cost ATC = $5.50 per unit 5 Marks Part 2 a) At a market price of $5.50 what is the Marginal Revenue for this firm? At a price of $5.50, MR = $5.50 b) At a market price of $5.50 what is the Average Revenue for this firm? Marginal revenue = average revenue = $5.50 Page 2 of 6

c) At a price of $5.50 how many units will this firm produce in the short run to maximize profit? Output volume = 6,000 units at a price of $5.50 because then MR = MC. d) What is the cost per unit? (See ATC) e) What will be its profit or loss per unit? 5 Marks

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Part 3 a) At a product price of $3 how does Marginal Revenue compare to Average Variable Costs? b) At a product price of $3 will it produce any units? If not, why not? c) If many firms leave the market how will this affect the market price? 3 Marks

Question 3 – 14 Marks Assume the industry in Question 2 is now a monopoly – Now there is only one supplier. Of the 1000 firms all 999 have closed due to government order, only one remains! The demand curve in this market is given by the equation Price, P = $10 – Q/1,000,000! Example if Q = 3,000,000 units, Price = $10 - 3,000,000/1,000,000 = $7/unit a)Calculate, plot and label the demand curve and the marginal revenue curve that the monopoly sees on the diagram below. 10 Marks

Now in Millions!

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b)To maximize profit how many units will the monopoly produce and sell? 3 Marks c)What price will the monopoly charge? 3 Marks d)How does the new monopoly price and quantity compare to the old price and quantity when there were 1000 firms in the perfect competitive industry? Label these two points PC (Perfect competition), and M (monopoly) in the diagram? 4 Marks

Question 4 – 25 Marks (Study Textbook page 275) The table below shows costs and demand data for a monopoly. Quantity Demanded 0 100 200 300 400 500 600 700 800 900

Price $35.00 32.00 29.00 26.00 23.00 20.00 17.00 14.00 11.00 8.00

Marginal Revenue

Average unit cost

Marginal cost

$ 32.00 26.00 20.00 14.00 8.00 2.00 –4.00 –10.00 –16.00

$48.00 30.00 23.34 21.00 20.00 19.50 19.28 18.68 18.72

$48.00 12.00 10.00 14.00 16.00 17.00 18.00 18.50 19.00

(a) If the monopoly is unregulated by the government: i.) what price will they charge? Explain why? 2 Mark i. Price = $23. At this price the additional revenue from one unit is equal to cost of producing one more unit (i.e MR = MC) so that there is not incentive for the monopolist to increase or decrease the price. At this price the profit for the monopolist is maximum ii. what output will they produce? 2 Marks Output/quantity demanded = 400 iii.

How much profit will they make? 2 Marks Profit = (P - C)*q Where C = average unit cost Therefore profit = (23 - 21)*400 = $800

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