R1.
You are a small firm competing with many other small firms on a market with homogeneous
goods. From consumers’ perspective, products of all firms are identical (i.e., they are perfect
substitutes). Consumers are also informed about each firm’s price and there are no
transportation costs. Consequently, your competitors’ prices are stable and equal to $180k per
unit.
You can produce up to 9 units (for production reasons), or choose to produce nothing. At (or
below) the "standard" price of $180k, you know that you can sell all these 9 goods.
If you set a price p+ above $180k, you won’t sell anything: Indeed, as you have many
competitors, we assume that customers who would have bought to you at $180k, will find one of
your many competitors who is willing to sell them a good at a price below p+.
1. If you decide to be active in this market, what price will you charge?
Your advisors give you a table summing up your costs, to help you choose the optimal quantity
to produce:
TC is your total cost incurred for producing the quantity displayed. MC is the marginal cost, that
is, the additional cost incurred for producing an extra unit (example: producing the 4th unit costs
you an additional $45k).
In this case, you will incur the fixed cost of $200k only if you produce a positive amount. That is,
if you decide to produce 0 units, your total cost will be $0. However, some data are missing.
Information
Q VC (k$) FC (k$) TC (k$) AC (k$) MC (k$)
1 0 200 200
2 6 200 206 103 6
3 27 200 227 75.6 21
4 72 200 272 68 45
5 150 200 350 70 78
6 270 200 470 78.3 120
7 441 200 641 91.5 171
8 672 200 872 109 231
9 972 200 1172 130.2 300
Q: quantity // VC: variable costs // FC: fixed costs // TC: total costs // AC: average cost // MC:
marginal cost
Your advisors disagree on what quantity you should produce.
1
The first advisor says that to maximize profit, you should increase production as long as the
marginal cost is lower than the price.
The second advisor maintains that you should minimize your costs and choose the production
level for which the average cost is the lowest.
2. According to you, what is the best strategy? (Obviously both advisors can be wrong).
3. How many goods do you want to produce?
4. How much is your profit?
R2. You are in the same situation as before (many small competitors, homogeneous products)
but with a different cost function and with a different market price: Now, consider that your
competitors all charge $230k. As you understood in previous round, the best you can do is to
also charge $230k. Consequently, we will only ask you about your production level.
Another difference with the previous round, is that you can now produce up to 10 units.
Cost
Q: quantity // VC: variable costs // FC: fixed costs // TC: total costs // AC: average cost // MC: marginal cost
5. How many goods do you want to produce?
R3. You are in the same situation as in the previous round, except that fixed costs are 4 times
higher (because one of your plants has collapsed): Last round, they were equal to $100k, they
are now equal to $400k.
Information
2
Q: quantity // VC: variable costs // FC: fixed costs // TC: total costs // AC: average cost // MC: marginal cost
This year, you have to select your price and production. Your competitors keep charging the
same price as last year, $230k. Considering the big increase in fixed costs, what is the best
strategy?
One of your advisors suggests that to compensate for the increase in fixed costs, you should raise
your price and select your production level by taking the highest quantity such that marginal
cost is lower than price.
Another advisor thinks that in this situation, average cost strategy is better. According to him,
you should choose your production level in order to minimize your average cost.
What is your choice? (Of course, both advisors can be wrong...).
6. Choose your price (k$) :
7. How many goods do you want to produce ?
R4. You now have the opportunity to sell your goods on an equivalent market, in another
country (demand is the same).
Because of local laws aiming at protecting employment, you must produce the goods in the
country. Production costs are the same as in the previous round, plus an extra fixed cost of
$800k (i.e. fixed costs are now $1200k instead of $400k).
Your competitors are local producers, they do not face the extra fixed cost and sell their goods at
$230k (same price as in previous round).
Information
3
Q: quantity // VC: variable costs // FC: fixed costs // TC: total costs // AC: average cost // MC: marginal cost
One of your advisor considers that costs are much too high and suggests that you should not
enter this market (that is, that you should produce 0 units).
According to a second advisor, the situation is the same as on the original market since the only
difference is a fixed cost, and you should produce the same quantity, 8 goods.
8. What is your choice? (Of course, both advisors can be wrong...). Choose the quantity :
Pregunta Respuestas
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