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A monopolistic producer of two goods, G1 and G2, has a total cost function
TC = 5Q(1) +10Q(2)
where Q(1) and Q(2) denote the quantities of G1 and G2 respectively. If P1 and P2 denote the corresponding prices then the demand equations are
P(1) = 50 - Q(1) - Q(2)
P(2) = 100 - Q(1) - 4Q(2)
Find the maximum profit if the firm's total costs are fixed at $100. Estimate the new optimal profit if total costs rise to $101.
Your company is currently producing at Q = 200 units/ month. FC = $ 500 / month.
At the current output level: MC = $ 10 = ATC
At Q = 150, MC = $ 6 = AVC
The market price Pm = $ 8.
If your goal is profit maximization, should you continue at Q = 200, increase Q above 200, or reduce Q below 200? Would you do better to shut down?
• The assumption of price-taking in perfectly competitive market is justified when there are a large number of buyers and sellers in the market. In large cities, there are many restaurants and many radio stations. Would you describe the restaurant market and the market for radio advertising as perfectly competitive? Explain whether the other assumptions are satisfied.
There are two workers. Each worker’s demand for a public good is P =20 -
Q. The marginal cost of providing the public good is $24. The accompanying graph summarizes the relevant information.
a. What is the socially efficient quantity of the public good?
b. How much will each worker have to pay per unit to provide the socially
efficient quantity?
There are two workers. Each worker’s demand for a public good is P = 20 - Q.
The marginal cost of providing the public good is $24. The accompanying graph summarizes the relevant information.
a. What is the socially efficient quantity of the public good?
b. How much will each worker have to pay per unit to provide the socially
efficient quantity?
c. Suppose the two workers contribute the amount needed to provide the quality of public good you identified in parts (a) and (b). A third worker values the public good just like the two contributing workers, but she
claims not to value the good because she wants to “free ride” on the pay-
ments of the other two workers.
(1) Given the three workers’ true demands for the public good, is the amount
of the public good provided by the two workers socially efficient?
(2) Compare the level of consumer surplus enjoyed by these three workers.
Which worker(s) enjoys the most surplus?
Using the Cobb- Douglas production function and the following data:
Output (Y) = $ 6 trillion, rental cost (rc) = 0.15, the share of capital in output (γ) = 0.4
Calculate the desired capital stock (K*)
Now suppose that Y is expected to rise to $ 7 trillion. What is the corresponding K*?
Suppose the capital stock was at its desired level before the change in the income was expected.
Using the Cobb- Douglas production function and the following data:
Output (Y) = $ 6 trillion, rental cost (rc) = 0.15, the share of capital in output (γ) = 0.4
Calculate the desired capital stock (K*)
Now suppose that Y is expected to rise to $ 7 trillion. What is the corresponding K*?
Suppose the capital stock was at its desired level before the change in the income was expected. Further, the rate of adjustment of actual capital stock to desired level (λ) = 0.4 in the flexible accelerator model of investment. What will the rate of investment be in the first year after expected income changes?
Does your answer in ‘part c’ refer to gross or
1. A local gym owner knows that there are two types of customers: type 1 is serious about fitness while type 2 is the casual gym go-er. He has no fixed cost and the marginal cost of providing an extra unit of service is 1/-. He has the following information
· There are consumers of type 1 each with the demand curve
· There are consumers of type 2 each with the demand curve
How does his optimal strategy depend on the relative size of and if he adopts a two-part tariff pricing1.
Following information shows that a firm offering a good at different prices to groups of consumers with different levels of willingness to pay.
Inverse Demand for movies: P1 = 20 – 4Q1
Inverse Demand for students: P2 = 10 – Q2
MC = 4Q LKR /ticket
(a) What price and quantity and maximizes profits if the firm charges each market?
(b) Demonstrate that charging different prices for the two groups results in higher profits than charging the same price for everyone.
Following information shows that a firm offering a good at different prices to groups of consumers with different levels of willingness to pay.
Inverse Demand for movies: P1 = 20 – 4Q1
Inverse Demand for students: P2 = 10 – Q2
MC = 4Q LKR /ticket
(a) What price and quantity and maximizes profits if the firm charges each market?
(b) Demonstrate that charging different prices for the two groups results in higher profits than charging the same price for everyone.
