4a Chapters 13 and 14 Review Exercises with answers

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1 Chapters 13 and 14 Review Questions Question 1 Suppose a competitive firm sells its product at the market price of $8. Some of its production costs are the following. q TR MR TC MC MR - MC 0 $0 $8 1 $8 $8 $13 $5 2 $16 $8 $17 $4 3 $20 $3 4 $25 $5 5 ? $7 6 $41 ? a. What is the profit-maximizing quantity? b. Calculate the profit or loss.
2 Suggested answer q TR MR TC MC MR - MC 0 $0 $8 1 $8 $8 $13 $5 $3 2 $16 $8 $17 $4 $4 3 $24 $8 $20 $3 $5 4 $32 $8 $25 $5 $3 5 $40 $8 $32 ( = $25 + $7) $7 $1 6 $48 $8 $41 $9 ( = $41 - $32) -$1 a. What is the profit-maximizing quantity? The last positive number of MR – MC is $1 where q = 5. Thus, the profit-maximizing quantity is 5 units. b. What is the profit? Profit = TR – TC = $40 - $32 = $8
3 Question 2 The diagram below depicts the cost curves for a perfectly competitive flash drive producer and its MR curve. a. Suppose the market price of a flash drive is $6. Calculate the loss. b. If this firm instead shuts down and produces 0 unit, calculate the loss. c. Should it continue to produce, or should it shut it down in the short run? d. Does your answer to (c) change if the price of a flash drive is $12 rather than $6? 50 MR = P = $6
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4 Suggested answer a. Suppose the market price of a flash drive is $6. Calculate the loss. Profit = P x q – ATC x q = $6 x 50 - $16 x 50 = $300 - $800 = - $500, or Profit = (P – ATC) q = ($6 - $16) 50 = -$500, a loss of $500 b. If this firm instead shuts down and produces 0 unit, calculate the loss. The loss = FC How to calculate the FC? ࠵?࠵? = ࠵?࠵? − ࠵?࠵? ࠵?࠵? ࠵?࠵?࠵? = ࠵?࠵? ࠵? ࠵?࠵? = ࠵?࠵?࠵? x ࠵? ࠵?࠵?࠵? = ࠵?࠵? ࠵? ࠵?࠵? = ࠵?࠵?࠵? x ࠵? ࠵?࠵? = ࠵?࠵?࠵? x ࠵? − ࠵?࠵?࠵? x ࠵? ࠵?࠵? = ࠵?࠵?࠵? x ࠵? − ࠵?࠵?࠵? x ࠵? = (࠵?࠵?࠵? − ࠵?࠵?࠵?) x ࠵? = ($16 - $8) x 50 = $400 c. Should it continue to produce, or should it shut it down in the short run? The firm will shut down the operation in the short run. This conclusion is consistent with what you learned in Question 2 in Chapter 14 Worksheet 1. P = $6 < min AVC. At the output quantity of 50 units, P < AVC and TR < VC. Thus, the loss will be larger than the FC. TR = P x q VC = AVC x q TR – VC Profit = (TR – VC) - FC $6 x 50 = $300 $8 x 50 = $400 $300 - $400 = -$100, an operating loss -$100 - $400 = -$500 d. Does your answer to (c) change if the price of a flash drive is $12 rather than $6? The price $12 is less than min ATC = $14. The firm still incurs a loss. However, it will continue to operate because TR > VC and the loss is less than the FC of $400. TR > VC P = $12 > min AVC = slightly less than $8 At the output quantity, P > AVC and TR > VC. The loss is less than the FC. Profit = (TR – VC) – FC = a positive number – FC.
5 Question 3 a. Calculate the AVC, ATC, and MC for the given cost data of a firm b. Plot the AVC, ATC, and MC curves using your calculations in part a. c. Suppose the market price = $28 per unit. Determine the profit-maximizing quantity of this firm in the SR. Calculate the profit or loss. Use an area to represent it. q VC FC TC AVC ATC MR MC MR - MC 0 $0.00 $50.00 $50.00 1 $50.00 $50.00 $100.00 2 $78.00 $50.00 $128.00 3 $98.00 $50.00 $148.00 4 $112.00 $50.00 $162.00 5 $130.00 $50.00 $180.00 6 $150.00 $50.00 $200.00 7 $175.00 $50.00 $225.00 8 $204.00 $50.00 $254.00 9 $242.00 $50.00 $292.00 AVC, ATC, MC ࠵?
6 Suggested answer q VC FC TC AVC ATC MR MC MR - MC 0 $0.00 $50.00 $50.00 1 $50.00 $50.00 $100.00 $50.00 $100.00 $28.00 $50.00 -$22.00 2 $78.00 $50.00 $128.00 $39.00 $64.00 $28.00 $28.00 $0 3 $98.00 $50.00 $148.00 $32.67 $49.33 $28.00 $20.00 $8.00 4 $112.00 $50.00 $162.00 $28.00 $40.50 $28.00 $14.00 $14.00 5 $130.00 $50.00 $180.00 $26.00 $36.00 $28.00 $18.00 $10.00 6 $150.00 $50.00 $200.00 $25.00 $33.33 $28.00 $20.00 $8.00 7 $175.00 $50.00 $225.00 $25.00 $32.14 $28.00 $25.00 $3.00 8 $204.00 $50.00 $254.00 $25.50 $31.75 $28.00 $29.00 -$1.00 9 $242.00 $50.00 $292.00 $26.89 $32.44 $28.00 $38.00 -$10.00
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7 ATC AVC, ATC, MC AVC MC
8 Determine the quantity produced when P = $28. The firm will not produce 2 units. The loss of producing 2 units = $28 x 2 - $128 = - $72 The firm will keep increasing its output because MC is decreasing at q = 2. It will be able to obtain the gains for the units between the 3rd unit and the 7th unit. The quantity produced is 7 units. Profit = $28 x 7 - $225 = - $29, a loss. But the loss is less than FC = $50 because TR = $196 > VC = $175. q VC FC TC AVC ATC MR MC MR - MC 0 $0.00 $50.00 $50.00 1 $50.00 $50.00 $100.00 $50.00 $100.00 $28.00 $50.00 -$22.00 2 $78.00 $50.00 $128.00 $39.00 $64.00 $28.00 $28.00 $0 3 $98.00 $50.00 $148.00 $32.67 $49.33 $28.00 $20.00 $8.00 4 $112.00 $50.00 $162.00 $28.00 $40.50 $28.00 $14.00 $14.00 5 $130.00 $50.00 $180.00 $26.00 $36.00 $28.00 $18.00 $10.00 6 $150.00 $50.00 $200.00 $25.00 $33.33 $28.00 $20.00 $8.00 7 $175.00 $50.00 $225.00 $25.00 $32.14 $28.00 $25.00 $3.00 8 $204.00 $50.00 $254.00 $25.50 $31.75 $28.00 $29.00 -$1.00 9 $242.00 $50.00 $292.00 $26.89 $32.44 $28.00 $38.00 -$10.00
9 ATC AVC, ATC, MC AVC MC
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10 ATC AVC, ATC, MC AVC MC Profit = $28 x 7 - $225 = - $29, a loss

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