Chapter 12

Problem 2
2i) If price is $14 per pizza:
Marginal cost (MC) is defined as the rise in total absolute cost per unit increase in quantity
produced.
46 MC is between 0 and 1 pizzas = 21 to 10 = $11
Between 1 and 2 pizzas, MC is $30 – $21 = $9
Using the number of pizzas as a driver For the quantity between 2 & 3; MC = $41 – $30 = $11
MC is $54 when serve between 3 and 4 pizzas. So MC = $41 + $13 = $54
Serving 4 to 5 pizzas, MC costs $15 ($69 – $54).
This is where MC=price, at 2 Pizzas per hour is the profit maximizing quantity.
The following is the formula to calculate profit Total revenue takes all the money that your
business makes and deduct from it all the money that was spent by your business Total costs =
Total Revenue – Total Costs
* Total Revenue at serving 2 pizzas per hour = 2 x $14 = $28
Total Cost when 2 pizzas per hour are made is $30
* Profit = $28 - $30 = -$2

2ii) If price is $12 per pizza, the profit-maximizing output is 3 pizzas per hour:
* Profit = 3 * $12 - $41 = $3

2iii) Owing to the fact that a pizza costs $10, it is most efficient to produce 1 pizza per hour to
increase profits.
or * profit = 1 * $10 – $21 = -$11

Problem 3
The shutdown point is where price is equal to the average variable cost. Variable costs are $10
per hour on average irrespective of the production level. So average variable costs are:
* 1 pizza: $11
* 2 pizzas: $9
* 3 pizzas: $10
* 4 pizzas: $11
* 5 pizzas: $12
The shutdown is set at one pizza per hour. If Pat’s shuts down profit is -Fixed Cost = -$10

Problem 4
Meanwhile, the supply curve Which plots the quantity supplied at each price shows what amount
of the good is supplied. From the profit-maximization analysis above:
* Price = 10$, Quantity Supplied = 1 pizza
* Price = $12, Quantity Supplied = 3 pizzas
* Price = $14, Quantity Supplied = Of course, 2 pizzas.

Quantity supplied
3.5

2.5

1.5

0.5

0
10 12 14

Quantity supplied

Problem 15
a) The temporary plant shutdowns will affect GM's costs in the following ways:
- TFC (Total fixed costs): These costs are likely to remain similar or slight-ly higher in the near
future since GM contin-ues to encounter other expenses like property tax and the depreciation of
the not in use factories. In the longer run, some fixed costs may decrease at GMs becoming an
opportunity.
- TVC (Total variable costs): These will reduce down as GM is not in a position to procure direct
materials, direct employments or any other variable manufacturing costs of the Production of
sedans and coupes.

- TC (Total costs): Will decrease over all due to large reduction in TVC. There is a possibility
that TFC might have a slight decrease, or might as well see a slight increase.

b) The shutdown decision will maximize economic profit (minimize loss) if:

This implies that the total operating costs are lower under the strategy of reduced production than
if the goods are being produced continuously. This can accomplished by decreasing the TVC
more than any increase in the TFC.

The organization foregone decent amount of revenue due to the reduction in production as
compared to the cost reduction. So any less than this length of time will be profit maximizing, as
long as the total of the constant revenue is less than the total of the constant costs.

c) GM will likely start producing the sedans and coupes again when:

People’s demand for sedans rises high enough to warrant the resumption of production. This
could be the case if perhaps the price for the gases go up then the fuel efficiency is esteemed so
much.

They can make the vehicles profitable once more through being able to cut manufacturing cost
further, or increase the price that consumers are willing to pay for the vehicles.

They require the use of excess of manufacturing capacity in these plants due to some shift in
demand for other models. Resumption of sedan manufacturing could be useful in coverage of
fixed costs.

Therefore, BM will again resume manufacturing cars if circumstances in the market improve to a
level where GM can recoup variable and fixed costs on sedans and coupes.
 Chapter 13
Problem 7
Profit maximizing unrealised firm
Quantity produced: Like any other perfectly competing firm, a profit maximizing monopoly
produces at the point which MR = MC. Because the marginal revenue curve is not presented
graphically, the monopoly will produce the quantity where MC equals D or demand curve at Q=
2 million cubic feet.

Price charged: The price from the demand curve D, where quantity equals 2 million cubic feet is
$6 per cubic feet.

Total surplus: This will appear under section DD and above section MM up to Q in which Q
represent quantity produced. It is the consumer and producer surplus before drawing any
conception of the deadweight loss.

Deadweight loss: The space between the marginal cost curve and the demand curve for quantities
not produced because of the behavior of the monopolist in an attempt to maximise profit.
Deadweight loss will prevail for any level above 20000 units or 2 million cubic feet in this case.
Problem 8
Tied with the understanding that it has to make no economic profit
Quantity produced: In the event that the government regulates the firm to make zero economic
profit it will operate where P=LRAC (long-run average cost curve). In the graph, this happens
where LRAC meets the demand curve, which seems to lie at around 3 million cubic feet.

Price charged: The price at this quantity (where LRAC = D) is $5 per cubic foot as shown in the
figure above.

Total surplus and deadweight loss: At this point the firm isn’t earning an economic profit, yet
there is still some deadweight loss because the firm isn’t operating at P=MC (the efficient
outcome).
Problem 9
Regulated to be efficient
Quantity produced: Firm will produce where P=MC which is the socially efficient level of
production. From the graph, this is attained at approximately 4 million cubic feet.

Price charged: At this quantity where MC = D, price is equal to $ 4 per cubic feet.

Total surplus: In this case, we see that the total surplus is maximized since the firm is achieving
the allocative efficient output. The benefit of the demand and supply curve is taken to the last
point and there exists no excess burden.
Problem 17
Part a:
In the graph below we are given a single-price monopoly having Marginal Cost (MC) and
Demand (D).

Profit-Maximizing Quantity and Price:

A single-price monopoly can maximise profit where the MC curve cuts the D curve.
This occurs at 200 newspapers per day and $60 per newspaper in this graph.
Total Revenue:

TR = Price × Quantity where Price affects the quantity of product to be sold in the market.
For this monopoly:
TR=60×200=12,000
The total of the centre's total sales revenue per day is $12000.

Part b:
Elasticity of Demand at the Price Charged:
It can also be defined or measured by the degree of responsiveness of quantity demanded to
changes in the availing price.
Demand curve is said to be elastic of within a given price range if the changes in price and the
changes in the quantities demanded are proportional with the degree of change in prices being
relatively larger. If the quantity demand changes only slightly in response to a change in price
then it is inelastic.
For instance in a monopoly, the price is set on the downward sloping part of the demand curve,
but in the inelastic portion of the demand curve for the maximum profit.
Due to this we see that this market is dominated by a monopolist and since price is more than the
average revenue, demand must be inelastic at the prevailing price of $ 60 for a newspaper since
the monopolist can afford to increase prices.
Problem 18
Consumer Surplus (CS): Amount is the area between the demand curve (D) and the price level
up to the quantity sold of 200 newspapers per day.
The amount of consumers’ surplus is the area of triangle with the demand curve and the price of
$60 at the quantity of 200.
Deadweight Loss (DWL): This is the area under the demand curve and above the MC curve in
the quantity between the monopoly quantity (200) and the competitive quantity (Where MC cuts
the demand curve in the lower price higher quantity region).
The deadweight loss is presented in the form of a triangular area of decreases in quantity because
of monopoly prices.
Explanation:
Rent-Seeking Behavior: With monopoly markets existing, the existence of rent-seeking is likely
because the firms or individuals would have to spend more resources to gain or sustain the
monopoly right in the market (for example, through lobbying). It also leads to wastages in the
economy since capital is used not for an aim of producing more products in the market, but to
defend the monopoly.
Problem 19
However, if this market were a perfect competition kind of market the result would be different
in nature.
In a perfectly competitive market the supply would go on rising till it equals the demand; in other
words, Price = Marginal Cost (MC).
From the graph this would happen where the marginal cost curve intersects the demand curve at
400 newspapers per day and a price of around $40 per newspaper.
Consumer Surplus: It would be higher than the monopoly because the consumers are taking one
newspaper at a cheaper price than before.
Producer Surplus: It would decrease because the price was based on competitive price which is
much lower than the marginal cost, but total surplus, calculated as the sum of consumer and
producer surplus would be the highest.

Chapter 14
Problem 14
How many Mountain bikes is manufactured and for how much?
From the graph above, the long-run equilibrium can also be confirmed by seeing that in the old
monopolization post, the quantity produced is 150 bikes whereby MC and ATC are equal.
The quantity price corresponding to this quality is approximately $220.
Problem 15
a. What is the long-run industry outlook for the number of firms that will be manufacturing and
selling mountain bikes? In the long run more players will come into the market because of the
existence of economic profit. This competition will force the price down to the extent that firms
in the market must be making only a normal profit (no economic profit).
b. What will be the long-term effect of price on mountain bikes and the number of bikes
produced by Mike’s Bikes? With the increasing number of firms operating within the industry
another consequence is the decrease in price of mountain bikes and therefore the number of bikes
manufactured by Mike’s Bikes. This is because competition has increased hence lowering
demand for product from any particular firm.
c. What dynamic process of adjustments will determine the quantity of mountain bikes produced
by all existing firms in the long run? Total amount of mountain bikes in the total industry will be
higher since the number of firms in the industry will rise, producing more bicycles.
Problem 16
By definition, excess capacity in the long run is unavoidable, so there appears to be no way for
Mike’s Bikes to avoid it.
In monopolistic competition, excess capacity situation prevailed in the long run premised on the
fact that firms operate at a sub-optimum scale of production. This is as characteristic of
monopolistic competition markets and something which Mike’s Bikes cannot do anything about.
This excess capacity is brought by the downward slopping demand curve, and thus when the
industry average total costs are not at their lowest point.
Problem 17
Is the market for mountain bikes efficient or inefficient in the long run? Explain your answer.
The market for mountain bikes is inefficient in the long run in monopolistic competition because:
Firms do not produce at the minimum point on their ATC curve, leading to excess capacity.
Price exceeds marginal cost (P > MC), meaning that firms do not produce the socially optimal
quantity. There is a deadweight loss because the price consumers pay is higher than the marginal
cost of production, and the market doesn't achieve allocative efficiency.