Class: BA1707

Name: Nguyễn Thị Hồng Khánh

ID: CS171962

HOMEWORK 2

2. A commercial fisherman notices the following relationship between hours spent

fishing and the quantity of fish caught:
a. What is the marginal product of each hour spent fishing?

HOUR QUANTITY MARGINAL FIXED VARIABL TOTAL COST

S OF FISH ( IN PRODUCT COST E COST
POUNDS)
0 0 0 10 0 10
1 10 10 10 5 15
2 18 8 10 10 20
3 24 6 10 15 25
4 28 4 10 20 30
5 30 2 10 25 35

b. Use these data to graph the fisherman’s production function. Explain its shape:
Quantity of fishes

Number of our spent

The production function gets flattered as the number of hours spent in creases, reflects
the diminishing marginal product.

c. The fisherman has a fixed cost of $10 (his pole). The opportunity cost of his time is
$5 per hour. Graph the fisherman’s total-cost curve. Explain its shape.
Total cost

Quantity of fish
The total cost curve gets steeper as the quantity of output increases because of
diminishing marginal product.
3. Jane’s Juice Bar has the following cost schedules:
a. Calculate the average variable cost, average total cost, and marginal cost for each
quantity.
Quantity Variable Total cost Average Average total Marginal cost
cost variable cost cost
0 vats of huice $0 $30 0 0 0
1 10 40 10 40 10
2 25 55 12,5 27.5 15
3 45 75 25 25 20
4 70 100 17,5 25 25
5 100 130 20 26 30
6 135 165 22,5 27,5 35

b. Graph all three curves. What is the relationship between the marginal cost curve
and the average total cost curve? Between the marginal cost curve and the average
variable cost curve? Explain.

The figure below shows the three curves.

The marginal-cost curve is below the average-total-cost curve when output is less than
four and the average total cost is declining. The marginal-cost curve is above the average-
total-cost curve when output is above four and the average total cost is rising.
4. Ball Bearings, Inc. faces costs of production as follows:
a. Calculate the company’s average fixed costs, average variable costs, average total
costs, and marginal costs at each level of production.
Quantity TFC TVC AFC ACV ATC MC TC
0 $100 $0 0 0 0 0 100
1 100 50 100 50 150 50 150
2 100 70 50 35 85 20 170
3 100 90 33,3 30 63,3 20 190
4 100 140 25 35 60 50 240
5 100 200 40 40 60 60 300
6 100 360 60 60 76,6 160 460

b. The price of a case of ball bearing is $50. Seeing that he can’t make a profit, the
chief executive officer (CEO) decides to shut down operations. What is the firm’s
profit/loss? Was this a wise decision? Explain.
If the price is $50, the company will produce 4 units left, the price will be equal to the
price of marginal cost.
When producing 4 units => total revenue $50 x 4 = $200, total cost $100 + $140 = $240.
This resulted in the company losing $40. If the firm shuts down, it will earn a loss equal
to its fixed cost ($100). The CEO did not make a wise decision.

5. An industry currently has 100 firms, each of which has fixed costs of $16 and
average variable costs as follows:
a. Compute a firm’s marginal cost and average total cost for each quantity from 1
to 6.

Quantity Average Marginal Average FC Total cost Variable cost

Variable cost total cost
cost
1 1 - 17 16 17 1
2 2 3 10 16 20 4
3 3 5 8,33 16 25 9
4 4 7 8 16 32 16
5 5 9 8,2 16 41 25
6 6 11 8,66 16 52 36

b. The equilibrium price is currently $10. How much does each firm produce?
What is the total quantity supplied in the market?

The equilibrium price is $10, each firm will produce 5. And the total supply in the
market is 100 x 5 = 500.
c. In the long run, firms can enter and exit the market, and all entrants have the
same costs as above. As this market makes the transition to its long-run equilibrium,
will be price rise or fall? Will the quantity demanded rise or fall? Will the quantity
supplied by each firm rise or fall? Explain your answer.
At equilibrium Q=5, TC = $41, TR = $10 x 5 = $50. => Profit = $50 - $41 = $9.
With profit, companies will participate more, quantity supplied will increase,
prices will decrease, and quantity demanded will decrease.
6. Suppose the marginal cost of a perfectly competitive firm is given by MC = 10 +
2Q
The price is $50
a. How much quantity will the firm produce?
Perfect competitive: P = MC => 50 = 10 + 2Q => Q = 20
b. What is the firm’s producer surplus
 Producer surplus: PS = ( 50 – 10 ) x 20/2 = 400$
c. Suppose TFC = $300, is the firm profitable in the short run?
FC = $300
TC = FC + VC
=> TC = $300 + 10Q + Q^2 = $900
Profitable in the short run: Profit = TR – TC = $1000 – $900 = $100
7. You live in a town with 300 adults and 200 children, and you are thinking about
putting on a play to entertain your neighbors and make some money. A play has 3 a
fixed cost of $2000 but selling an extra ticket has zero marginal cost. Here are the
demand schedules for your two types of customers:
a. To maximize profit, what price would you charge for an adult ticket? For a
child’s ticket? How much profit do you make?
Price Adults Children
$10 0 0
9 100 0
8 200 0
7 300 0
6 300 0
5 300 100
4 300 200
3 300 200
 2 300 200
1 300 200
0 300 200

To maximize profit, The charged price is 7 for adults and a price of 4 for children.

TR = 7 x 300 + 4 x 200 = $2900
=> Profit = TR – TC = $2900 - $2000 = $900
b. The city council passes a law prohibiting you from charging different prices to
different customers. What price do you set for a ticket now? How much profit do
you make?
Set for a ticket now is $7.
TR = $7 x 300 = $2100 => Profit = $2100 - $2000 = $100
c. Who is worse off because of the law prohibiting price discrimination? Who is
better off? (If you can, quantity the changes in welfare?
No one is better off. Because children pay $7 instead of $4 per ticket. As demand falls,
the producer's profits also decrease.
d. If the fixed cost of the play were $2,500 rather than $2,000, how much your
answer to parts (a), (b), (c) change?
For parts (a) profit is $400
For parts (b) producer loses $400
For parts (c) no change
8. Based on market research, a firm production company in Ectenia obtains the
following information about the demand and production costs of its new DVD:
Demand: P = 1000-10Q
Total Revenue: TR = 1000Q – 10Q2
Marginal Revenue: MR = 1000 – 20Q
Marginal Cost: MC = 100 +10Q
Where Q indicates the number of copies sold and P is the price in Ectenia dollars:
a. Find the price and quantity that maximize the company’s profit.
Maximize the company’s profit: MR = MC
=> 1000 – 20Q = 100 + 10Q
=> Q = 30, P = 700
b. Find the price and quantity that would maximize social welfare.
Maximize social welfare: AR = MC
 (1000Q – 10Q^2) / Q = 100 + 10Q => Q = 45
P = 550

c. Calculate the deadweight loss from monopoly.

Deadweight loss is: SABC = (300 x 15) / 2 = $2250

1. A college student has two options for meals: eating at the dining hall for $6 per
meal or eating a Cup O' Soup for $1.50 per meal. Her weekly food budget is $60.
a. Draw the budget constraint showing the trade-off between dining hall meals and
Cups O' Soup. Assuming that she spends equal amounts on both goods, draw an
indifference curve showing the optimum choice. Label the optimum as point A

Assuming she spends the same amount on both meals, the optimal choice here would be
to choose 5 meals at the cafeteria ( 5 x $6 = $30 ) and choose 20 Cups O'Soups ( 20 x
$1,5 = $30 ) in each week.
b. Suppose the price of a Cup O' Soup now rises to $2. Using your diagram from
part (a), show the consequences of this change in price. Assume that our student
now spends only 30 percent of her income on dining hall meals. Label the new
optimum as point B.

Suppose the price of a cup of O' Soup increases by $2 and the student pays only 30% for
the meal in the dining room. => 3 meals in the dining room ( 30% x $60 = 18$ ), 21 cups
of O' Soup ( 70% x $60 = $42 )

c. What happened to the quantity of Cups O' Soup consumed as a result of this price
change? What does this result say about the income and substitution effects?
Explain.
When the price of the cup increases, the quantity consumed increases => the consumption
effect is stronger than the substitution effect for the O' Soup cup. The student is likely to
switch to another product but due to her low income, thus causing her to buy more cups.
=> The income effect is stronger than the substitution effect.

d. Use points A and B to draw a demand curve for Cup O' Soup. What is this type of
good called?
O' Soup belongs to the category of secondary goods. Because when the user's income is
low, the demand for O' Soup will increase. When income is high, the demand for Cup O'
Soup will decrease and be replaced by other better-quality products. For example, a $6
meal in the dining room.