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1.
The firm produces where MR = MC, but at this price, the firm suffers a loss. If
the situation does not improve, the firm will exit the market in the long run.
When it exits, producers of similar goods will likely see their demand curves
shift rightward as customers of the original firm seek out other firms from
which to buy the product.
2.
Initially, the monopolist earns an economic profit by producing where MR =
MC. Entry will occur, shifting the firm’s demand and marginal revenue curves
leftward (to D2 and MR2). Long run equilibrium will occur at a point like B,
where the firm earns zero economic profit.
3. a.
Price per
Eye Exam
$100
Eye Exams
per Week
100
Total Cost
per Week
$10,500
Total Revenue
per Week
$10,000
Marginal
Revenue
-$30
Marginal
Cost
-$7.50
$80
$60
$40
$20
140
200
310
550
$10,800
$11,300
$12,290
$14,760
$11,200
$13.33
$8.33
$3.64
$9.00
-$5.83
$10.29
$12,000
$12,400
$11,000
b. An optometry practice might face a downward sloping demand curve if it
could differentiate its product through location, hours of operation,
ambiance, quality of service, or frame selection.
c. The profit-maximizing price is $60 and the profit-maximizing number of
eye exams per week is 200.
4. a.
Price per
Taco Plate
Taco plates
per Week
Total Cost
per Week
$5
50
$30
4
3
2
1
80
150
800
1100
$50
$176
$1476
$2136
Total
Revenue per
Week
$250
Marginal
Revenue
Marginal
Cost
$2.33
$0.67
$1.86
$1.80
$1.77
$2.00
-$1.67
$2.20
$320
$450
$1600
$1100
Tino should expand his output as long as MR exceeds MC. His
profit-maximizing price is $3 and his profit-maximizing number of taco plates
is 150.
b. Tino’s customers will substitute away from Tino’s tacos towards food
from his competitor. Demand for Tino’s tacos will fall, and Tino’s profits
will fall.
c.
Price per
Taco Plate
Taco plates
per Week
Total Cost
per Week
$5
60
$130
4
96
3
180
2
960
1
1320
$150
$276
$1576
$2236
Total
Revenue per
Week
$300
Marginal
Revenue
Marginal
Cost
$2.33
$0.55
$1.86
$1.50
$1.76
$1.66
-$1.67
$1.83
$384
$540
$1920
$1320
Tino’s profit-maximizing price is $2, and his profit-maximizing number of
taco plates is 960. Since Tino earns an economic profit of $344 with this
combination, entry will occur until Tino’s economic profit falls to $0.
5. [Note: The question actually refers to Problem #3, not Problem #2.] He should
not shut down in the short run, because he is covering his average variable
costs (P = $60, AVC = $56.50).
6.
a.
The typical plastics firm produces the output level where MC = MR,
charges the corresponding price given by the demand curve, and earns zero
economic profit.
b.
Oil is a variable input, so when oil prices increase, the ATC curve and the
MC curve at all firms shift upward. In the short run, the typical plastics
firm suffers economic losses.
c. If prices remained high, and profits remained negative, some firms would
exit. Other firms would experience a rightward shift of their demand
curves, and in long-run equilibrium, the remaining firms would earn zero
economic profit.
7.
a.
b.