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Eco 200
Group Activity 4 Key
Chap 13 & 14 & 15
Chapter 13:
1. 4th Edition: p. 285, Problems and Applications, Q4
3rd Edition: p. 286, Problems and Applications, Q4
a. The following table shows the marginal product of each hour spent fishing:
Hours
Fixed
Cost
Fish
0
1
2
3
4
5
0
10
18
24
28
30
Variable
Marginal
Cost Total Cost Product
10
10
10
10
10
10
0
5
10
15
20
25
10
15
20
25
30
35
10
8
6
4
2
b. Figure 7 graphs the fisherman's production function. The production function becomes flatter as the
number of hours spent fishing increases, illustrating diminishing marginal product.
30
Quantity of
Fish
20
10
1
2
3
4
Hours Spent Fishing
5
Figure 7
c. The table shows the fixed cost, variable cost, and total cost of fishing. Figure 8 shows the fisherman's
total-cost curve. It has an upward slope because catching additional fish takes additional time. The curve is
convex because there are diminishing returns to fishing time because each additional hour spent fishing
yields fewer additional fish.
40
Total Cost
of Fishing
30
20
10
10
20
30
40
Quantity of Fish
Figure 8
1
2.
4th Edition: p. 287, Problems and Applications, Q11
3rd Edition: p. 288, Problems and Applications, Q11
The following table shows quantity (Q), total cost (TC), and average total cost (ATC) for the three firms:
Firm A
Firm B
Firm C
Quantity
Total
Cost
Average
Total Cost
Total
Cost
Average
Total Cost
Total
Cost
Average
Total Cost
1
2
3
4
5
6
7
60
70
80
90
100
110
120
60
35
26.7
22.5
20
18.3
17.1
11
24
39
56
75
96
119
11
12
13
14
15
16
17
21
34
49
66
85
106
129
21
17
16.3
16.5
17
17.7
18.4
Firm A has economies of scale because average total cost declines as output increases. Firm B has
diseconomies of scale because average total cost rises as output rises. Firm C has economies of scale for
output from one to three and diseconomies of scale for levels of output beyond three units.
Chapter 14:
3. 4th Edition: p. 308, Problems and Applications, Q5
3rd Edition: p. 309, Problems and Applications, Q6
Here is the table showing costs, revenues, and profits:
Quantity
Total
Cost
Marginal
Cost
Total
Revenue
Marginal
Revenue
Profit
0
1
2
3
4
5
6
7
8
9
10
11
13
19
27
37
1
1
1
2
6
8
10
0
8
16
24
32
40
48
56
8
8
8
8
8
8
8
-8
-1
6
13
19
21
21
19
a. The firm should produce five or six units to maximize profit.
b. Marginal revenue and marginal cost are graphed in Figure 4. The curves cross at a quantity between five
and six units, yielding the same answer as in Part (a).
10
Marginal Cost
Revenue & 8
Costs
6
Marginal Revenue
4
2
1
2
3
4
5
Figure 4
6
7
Quantity
2
c. This industry is competitive because marginal revenue is the same for each quantity.
The industry is not in long-run equilibrium, because profit is not equal to zero.
4.
4th Edition: p. 309, Problems and Applications, Q10
Not in 3rd Edition, see Practice Test #1 Question #2 for question…
a. The firms' variable cost (VC), total cost (TC), marginal cost (MC), and average total cost
(ATC) are shown in the table below:
Quantity
1
2
3
4
5
6
Variable Total
Cost
Cost
1
4
9
16
25
36
Marginal Average
Cost Total Cost
17
21
26
32
41
52
1
3
5
7
9
11
17
10.5
8.67
8
8.2
8.67
b. If the price is $10, each firm will produce five units, so there will be 5 × 100 = 500 units supplied in the
market.
c. At a price of $10 and a quantity supplied of five, each firm is earning a positive profit because price is
greater than average total cost. Thus, entry will occur and the price will fall. As price falls, quantity
demanded will rise and the quantity supplied by each firm will fall.
d. Figure 10 shows the long-run industry supply curve, which will be horizontal at minimum average total
cost.
Firm
Industry
MC
Price
and
Costs
ATC
P1
Price
and
Costs
S
Quantity
Quantity
Figure 10
Chapter 15:
5. 4th Edition: p. 340, Problems & Applications, Q1
3rd Edition: p. 342, Problems & Applications, Q1
The following table shows revenue, costs, and profits, where quantities are in thousands, and total revenue,
total cost, and profit are in millions of dollars:
3
Quantity
Total
Marginal Total
Price (1000s) Revenue Revenue Cost Profit
100
0
0
2
-2
90
100
9
9
3
6
80
200
16
7
4
12
70
300
21
5
5
16
60
400
24
3
6
18
50
500
25
1
7
18
40
600
24
-1
8
16
30
700
21
-3
9
12
20
800
16
-5
10
6
10
900
9
-7
11
-2
0
1000
0
-9
12
-12
a. A profit-maximizing publisher would choose a quantity of 400,000 at a price of $60 or a quantity of
500,000 at a price of $50; both combinations would lead to profits of $18 million.
b. Marginal revenue is always less than price. Price falls when quantity rises because the demand curve
slopes downward, but marginal revenue falls even more than price because the firm loses revenue on all the
units of the good sold when it lowers the price.
c. Figure 2 shows the marginal-revenue, marginal-cost, and demand curves. The marginal revenue and
marginal-cost curves cross between quantities of 400,000 and 500,000. This signifies that the firm
maximizes profits in that region.
100
Price,
Revenue,
Costs
DWL
MC
Demand
400
500
1000
MR
Quantity
Figure 2
d. The area of deadweight loss is marked “DWL” in the figure. Deadweight loss means that the total
surplus in the economy is less than it would be if the market were competitive, because the monopolist
produces less than the socially efficient level of output.
e. If the author were paid $3 million instead of $2 million, the publisher would not change the price,
because there would be no change in marginal cost or marginal revenue. The only thing that would be
affected would be the firm’s profit, which would fall.
f. To maximize economic efficiency, the publisher would set the price at $10 per book, because that is the
marginal cost of the book. At that price, the publisher would have negative profits equal to the amount paid
to the author.
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6.
4th Edition: p. 342, Problems & Applications, Q13
Not in 3rd Edition, see Practice Test 2, Question #3 for the question…
a. The marginal revenue from selling to each type of consumer is shown in the following tables:
Price
10
9
8
7
6
5
4
3
2
1
0
Price
10
9
8
7
6
5
4
3
2
1
0
b.
c.
Marginal
Quantity Total Revenue Revenue from
of Adult
from Sale of
Sale of Adult
Tickets
Adult Tickets
Tickets
0
100
200
300
300
300
300
300
300
300
300
0900
1600
2100
1800
1500
1200
900
600
300
0
9
7
5
-3
-3
-3
-3
-3
-3
-3
Marginal
Quantity Total Revenue Revenue from
of Child
from Sale of
Sale of Child
Tickets
Child Tickets
Tickets
0
0
0
0
0
100
200
200
200
200
200
0
0
0
0
0
500
800
600
400
200
0
0
0
0
0
5
3
-2
-2
-2
-2
To maximize profit, you should charge adults $7 and sell 300 tickets. You should charge children $4
and sell 200 tickets. Total revenue will be $2,100 + $400 = $2,500. Because total cost is $2,000, profit
will be $900.
If price discrimination were not allowed, you would want to set a price of $7 for the tickets. You
would sell 300 tickets and profit would be $100.
The children who were willing to pay $4 but will not see the show now that the price is
$7 will be worse off. The producer is worse off because profit is lower. Total surplus is lower. There is
no one that is better off.
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