Northeastern University

University College

Economic Principles III

ECN 4117 Winter 1995 Due:- Jan. 27, 1995

Problem Set #1

1. Consider data on the table below relating to output, price and cost of a firm under

perfect competition.

Total Total Total Marginal Total

Output Price Revenue Cost Cost Profit

(Q) (P=MR) (TR) (TC) (MC) (TR-TC)

0 $10 -- $15 -- ---

1 10 $10 20 $5 ---

2 10 20 23 3 ----

3 10 30 25 2 ---

4 10 40 33 8 ---

5 10 50 43 10 ---

6 10 60 55 12 ---

a) Calculate the total profit of this firm corresponding to every units of output

given in the first column. Determine the profit maximizing output.

Does the market price depend upon output of the firm. If not

explain what is the type of demand curve for this firm ?

Which of the essential characteristics of perfect competition causes this to happen ?

b) From the data given above graph the relationship of output with

a) marginal revenue (MR) and marginal cost (MC)

b) total revenue (TR) and total cost (TC).

What happens to MR and MC as output increases. Why MR=P

for a perfectly competitive firm ?

c) Explain why MR= P in case of perfect competition. Why conditions A and C below are not optimal and why condition B is optimal ?

A. MC > P

B. P = MC

C. MC < P

d) What happens to TR and TC as output increases. Graph TR and TC with the level of output. What is the shape of average cost curve. Why does marginal cost curve cut the average cost curve at its minimum point ?

e) What is the relation between output and profit ?

2 Question #4 (page # 463 of the text). (Hint:- Firms short run supplycurve is MC curve on or above the AVC, if the MC<AVC, a firm minimizes loss just by shutting down the plant. Also note that in a perfectly competitive market P=MR=MC at equilibrium. For subquestion (g) just find compare the supply schedule you get answering (d) with the given demand schedule and equate demand and supply to get the equilibrium price and quantity)

3. Question #8 (page 464 of the text). (Hint:- This relates to long run supply curve of a firm under different returns to scale; compare by shifting demand and corresponding supply responses)

4.Consider the table below, and then answer the questions that follow.

Total Total Marginal Marginal Total Total

Output Price Revenue Revenue Cost Cost Profit

(Q) (P) (TR=P•Q) (MR) (MC) (TC) (TR-TC)

0 $20 -- -- -- $15 ----

1 18 $18 -- --- 20 - ---

2 15 30 --- --- 23 --

3 13 39 -- -- 25 ---

4 12 48 -- --- 33 ----

5 11 55 -- --- 43 ----

6 10 60 -- --- 55 ---

a) Calculat marginal revenue (MR), marginal cost (MC) and total profit of

this firm for every output.

b) A monopolist is the sole seller of a good. The demand curve facing the

monopolist, therefore, is the same as the market demand curve for the good.

Draw the demand curve for this product.

c) Find the price that monopolist will charge to maximize profit. How much

does he produce at that price ? How much is the profit ? Illustrate

graphically.

d) Why the marginal revenue of a monopolist is less than the average

revenue ? Explain.

5. Question # 5 (page 484 of the text). (Hint:- Given a downward sloping demand curve for a firm under monopoly, MR is no longer constant, it diminishes with extra unit sold in the market. Use MR=MC rule to answer the first part of the question. In perfect price discrimination firm will produce at a point wher MR=MC, calculate profit corresponding to that point).