TASK 3 BLOCK 3 

Solve these following 4 exercises: 

Exercise 1

The production function of a company is as follows:

L (hours) 4 7 10 16 20 22 25 32 38 45 50 62 74 80
Y 4 9 16 33 50 65 85 120 140 156 165 173 178 178

The Fix Cost is 100 € and the labour cost is 5€ per hour worked. With these data, calculate
(using an approximation of two decimals) and draw graphically the following variables:

L Y MPL APL FC VC TC MC AFC AVC ATC

4 4 100 20 120
7 9 1,67 1,29 100 35 135 3,00 11,11 3,89 15,00
10 16 2,33 1,60 100 50 150 2,14 6,25 3,13 9,38
16 33 2,83 2,06 100 80 180 1,76 3,03 2,42 5,45
20 50 4,25 2,50 100 100 200 1,18 2,00 2,00 4,00
22 65 7,50 2,95 100 110 210 0,67 1,54 1,69 3,23
25 85 6,67 3,40 100 125 225 0,75 1,18 1,47 2,65
32 120 5,00 3,75 100 160 260 1,00 0,83 1,33 2,17
38 140 3,33 3,68 100 190 290 1,50 0,71 1,36 2,07
45 156 2,29 3,47 100 225 325 2,19 0,64 1,44 2,08
50 165 1,80 3,30 100 250 350 2,78 0,61 1,52 2,12
62 173 0,67 2,79 100 310 410 7,50 0,58 1,79 2,37
74 178 0,42 2,41 100 370 470 12,00 0,56 2,08 2,64
80 178 0,00 2,23 100 400 500 #¡DIV/0! 0,56 2,25 2,81
1. The function of total production.

Y
200

150

100

50

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14

2. The average productivity of labour (APL) and the marginal productivity of labour
(MPL).

Average productivity of labour (APL) and the Marginal productivity

of labour (MPL).
8,00
7,00
6,00
5,00
4,00
3,00
2,00
1,00
0,00
1 2 3 4 5 6 7 8 9 10 11 12 13 14

MPL APL

3. The functions of total cost (TC), fixed cost (FC) and variable cost (VC).

Total cost (TC), fixed cost (FC) and variable cost (VC).
600
500
400
300
200
100
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14

FC VC TC
 4. The functions of average total cost (ATC), average variable cost (AVC), average
fixed cost (AFC) and marginal cost (MC).

Average total cost (ATC), average variable cost (AVC), average fixed
cost (AFC) and marginal cost (MC)
16,00
14,00
12,00
10,00
8,00
6,00
4,00
2,00
0,00
1 2 3 4 5 6 7 8 9 10 11 12 13 14

MC AFC AVC ATC

5. Set the equivalent production and the cost corresponding to the break-even
point.

The breakeven point corresponds to the MC=ATC or, where the ATC is minimum; and in
this case ATC=2,07 is minimum, corresponding to L=38 workers and Y=140 units.

6. Set the equivalent production and the cost corresponding to the shutdown
point.

The shutdown point corresponds to the point where the MC=AVC or, where the AVC is
minimum; and in this case, when AVC=1,33 is minimum, corresponding to L=32 workers
and Y=120 units.
Exercise 2

The market for home widgets is characterized by perfect competition. Firms and
consumers are price takers and in the long-run there is free entry and exit of firms in this
industry. All firms are identical in terms of their technological capabilities. Thus, the total
cost function for a representative firm is given by the following equation: 

TCi = 2 qi2 + 5 qi + 50 

Suppose that the market demand is given by: 

P = 1,025 – QD 

(Note: Q represents market values and q represents firm values. The two are different) 

1. What is the short run equilibrium if the market price is 45? Calculate the market
quantity at the market equilibrium, the production of each firm, the total benefit
of each firm and the number of firms in the short run. 

If free market price is 45, then:

• The market quantity at the market equilibrium is 980.

𝑄" = 1,025 − P

𝑄" = 1,025 − 45

𝑄" = 980

• The production of each firm is 10 units.

MC = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒

𝜕𝑇𝐶
= 45
𝜕𝑄

4𝑞𝑖 + 5 = 45

𝑞𝑖 = 10

• The total benefit of each firm is 150€.

TB = 𝑇𝑅 − 𝑇𝐶

TB = (10 · 45) − (200 + 50 + 50) = 450 − 300 = 150

• The number of firms in the short run is 98.

980
= 98
10
 2. What is the long run market equilibrium (equilibrium price and equilibrium
quantity)? Calculate the production of each firm, the total benefit of each firm an
d the number of firms in the long run. 

In the long-run, at the market equilibrium, P= min ATC, or MC=ATC, or the break-even
point, then:

• The production of each firm is 5 units.

4𝑞𝑖 + 5 = 𝑀𝐶

𝑀𝐶 = 𝐴𝑇𝐶

2𝑞𝑖2 + 5𝑞𝑖 + 50
4𝑞𝑖 + 5 =
𝑄

4𝑞 𝑖2 + 5𝑞𝑖 = 2𝑞 𝑖2 + 5𝑞𝑖 + 50

2𝑞 𝑖2 + 0 − 50 = 0

2𝑞𝑖2 − 50 = 0

2𝑞𝑖2 = 50

𝑞𝑖 G = 5

𝑀𝑅 = 𝑀𝐶

𝑀𝐶 = 4(5) + 5 = 25

𝑀𝑅 = 25

• Equilibrium price = 25

𝑄" = 1025 − 𝑃

𝑄" = 1025 − 25

𝑄" = 1000

• Equilibrium quantity = 1000

• The total benefit of each firm is 0€.

𝑇𝐵 = 𝑇𝑅 − 𝑇𝐶 = (25 ∗ 5) − (2(25) + 5(5) + 50)

𝑇𝐵 = 𝑇𝑅 − 𝑇𝐶 = (125) − (125) = 0
 • The number of firms in the long run is 200

LMMM
The number of firms will be 𝑛 = N
= 200 = 200 𝑓𝑖𝑟𝑚𝑠

Exercise 3

In a perfectly competitive industry, all the potential firms are identical with the
following total cost function:  TCi = 6qi2 + 2qi + 96  

1. What is the shutdown price? What is the break-even price? 

• Shut-down price:

Minimum AVC = shut-down price

𝑉𝐶
𝐴𝑉𝐶 =
𝑄

6𝑞T + 2𝑞
𝐴𝑉𝐶 =
𝑞

𝐴𝑉𝐶 = 6𝑞 + 2

𝜕𝑉𝐶
𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝐴𝑉𝐶 =
𝜕𝑄

𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝐴𝑉𝐶 = 6 = 𝑃

• Break-even price:

Minimum AC = Break-even price

𝑇𝐶
𝐴𝐶 =
𝑄

96
𝐴𝐶 = 6𝑞 + 2 +
𝑞

𝐴𝐶 = 6𝑞 + 2 + 96 · 𝑞VL

𝜕𝑇𝐶
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐴𝐶 =
𝜕𝑄
 𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐴𝐶 = 6 − 96𝑞−2 = 0

96
6=
𝑞T

96
𝑞T = = 16
6

𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐴𝐶 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 4

96
𝑃 = 𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐴𝐶 = 6 · 4 + 2 + = 50
4

2. What is the supply curve of each firm? Suppose that there are 2 firms in the short-
run, what is the market supply? 

The MC will be the supply curve of the firm from the shutdown point.

𝑀𝐶 = 𝑆𝑢𝑝𝑝𝑙𝑦 𝑐𝑢𝑟𝑣𝑒

𝜕𝑇𝐶
𝑀𝐶 =
𝜕𝑄

𝑀𝐶 = 12𝑞𝑆 + 2 = 𝑃𝑆

12𝑞 G = 𝑃 G − 2

𝑃G 2
𝑞G = −
12 12

If in the market there are 2 firms in the short-run:

2𝑃 − 4
𝑄 G = 2 · 𝑞𝑆 =
12

3. The market demand is P = 114 – QD. Find the equilibrium price and the equilibrium
quantity?  

𝑄" = 𝑄 G

𝑄" = 114 − 𝑃
 2𝑃 − 4
114 − 𝑃 =
12

1368 − 12𝑃 = 2𝑃 − 4

1372 = 14𝑃

𝑃 = 98

𝑄\ = 114 − 98 = 16

4. How many units does each firm produce?  What is the profit of each firm? 

Each business produces under the criteria P = MC

𝜕𝑇𝐶
𝑀𝐶 =
𝜕𝑄

𝑀𝐶 = 12q + 2

98 = 12q + 2

96 = 12q

𝑞\ = 8

Profit:

𝑇𝐵 = 𝑇𝑅 − 𝑇𝐶 = (𝑝 ∗ 𝑞) − (6𝑞 − 2𝑞 − 96)

= (16 · 8) − (6(8) − 2(8) − 96)

= (16 · 8) − (6(8) − 2(8) − 96) = −32

5. Find the equilibrium in the long run, what is the equilibrium price? And the

equilibrium quantity? How many firms will there be in the long run? What is the
profit of each firm? 

Equilibrium in the long run.

Businesses produce a minimum MC

• Production of each company is 4.

𝜕𝑇𝐶 96
𝑀𝐶 = = 6𝑞 + 2 +
𝜕𝑄 𝑞
 𝜕𝑇𝐶
𝑀𝐶 = = 6𝑞 + 2 + 96𝑞VL
𝜕𝑄

𝜕𝑇𝐶
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝑀𝐶 = =0
𝜕𝑄

6𝑞 − 96𝑞VT = 0

96
6=
𝑞T

𝑞T = 16

𝑞 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑀𝐶 = 4

• Equilibrium price is 50: P = Minimum MC

96
𝑃 = 𝑀𝐶 = 6 · 4 + 2 + = 50
4

• Equilibrium Quantity in the long term (substituting in derivative)

𝑃 = 114 − 𝑄

𝑄\ = 114 − 50 = 64

• Number of firms = 16 firms

𝑄𝐸 64
𝑛= = = 16 𝑓𝑖𝑟𝑚𝑠
𝑞 4

• The total benefit of each firm is 0€.

𝑇𝐵 = 𝑇𝑅 − 𝑇𝐶 = (50 · 4) − (2(4)2 − 2(4) − 96) = 0

Exercise 4

In a competitive market, the market demand function is given by the expression:

P = 32 – 0.04QD. The technology available to businesses is reflected in the following total

cost function for each firm: TCi = 25 + qi 2. Then: 

1. If we know that the market equilibrium price in the short-run is 20; obtain the
expression of the supply function of a competitive company, the amount produced
 by each company, the economic profits for each company, the market equilibrium
quantity and the number of firms in the short run.

𝑃 = 32 − 0,04Q

𝑇𝐶 = 25 + 𝑞T

𝑃𝑟𝑖𝑐𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑠ℎ𝑜𝑟𝑡 𝑟𝑢𝑛 = 20

𝜕𝑇𝐶
𝑀𝐶 = = 2𝑞 = 𝑃𝑆
𝜕𝑄

𝑃𝑆
G
𝑞 =
2

• Amount produced by each company

20
𝑞= = 10
2

• Economic profit for each company

𝑇𝐵 = 𝑇𝑅 − 𝑇𝐶 = (20 · 10) − 25 − 102 = 75

• Market equilibrium

20 = 32 − 0,04Q

0,04Q = 12

12
𝑄\ = = 300
0,04Q

• Number of firms = 30 firms

𝑄𝐸 300
𝑛= = = 30 𝑓𝑖𝑟𝑚𝑠
𝑞 10

2. Determine the market equilibrium quantity, the market equilibrium price, the

amount produced by each company, the economic profits for each company and
the number of firms in the long run. 

In the long-run, at the market equilibrium, P= min ATC, or MC=ATC, or the break-even
point, then:

• Market equilibrium quantity = 5

 𝑇𝐶
𝐴𝑇𝐶 =
𝑞

25
𝐴𝑇𝐶 = + 𝑞 = 25𝑞VL + 𝑞
𝑞

𝜕𝑇𝐶
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐴𝑇𝐶 = = −25𝑞−2 + 1 = 0
𝜕𝑄

25
1=
𝑞2

𝑞T = 25

𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐴𝑇𝐶 = 5

• Market equilibrium price = 10

25
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐴𝑇𝐶 = + 5 = 10
5

• The amount produced by each company

10 = 32 − 0,04𝑄

0,04𝑄 = 22

22
𝑄\ = = 550
0,04

• The economic profits for each company

𝑇𝐵 = 𝑇𝑅 − 𝑇𝐶 = (10 · 5) − 25 − 52 = 0

• The number of firms in the long run

𝑄𝐸 550
𝑛= = = 110 𝑓𝑖𝑟𝑚𝑠
𝑞 5