Assignment:
Credit will only be given for answers with full work shown. Homework needs to be done in an organized manor with answers clearly labeled. This is an individual assignment and you are expected to do your own work.
1. Determine if each statement is true or false. Thoroughly explain your answer.
a. A competitive firm will shut down immediately if it starts to experience losses.
b. Since a monopoly can set its prices at any level it wants, it does not have to worry about experiencing losses.
c. Firms who compete in perfect competition and monopolistic competition markets will tend to earn a "Normal" profit in the long run.
d. If an auto manufacturer operates with a linear demand curve, if it wants to maximize its revenue it will charge a lower price than if it was trying to maximize profits.
e. If P>AVC, a firm's total fixed cost will be greater than its loss.
f. A monopoly will always earn economic profit because it is able to set any price that it wants to.
2. Using Excel or a table, use the following information to answer the questions. Market demand curve, Q= 30- 2P and a supply curve Q(s)= -10+2P.
a. Find the market equilibrium price and quantity.
b. What is the quantity supplied and demanded if P= $5, $,6, $7.....$15.
c. Using the same table determine the price and quantity if the firm was operating as a monopoly.
3. Sherwin Williams and DuPont are two paint companies who are duopolists that produce identical products. Demand for paint can be represented with the following function,
where QA is Sherwin Williams' quantity and QB DuPont's quantity, sold by firms at P, the selling price.
Total cost functions for the two companies are:
TCA = 550,000 + 210QA + .5QA2
TCB = 220,000 + 420QB + QB2
Assume Sherwin Williams and DuPont act independently,
A. Determine the long-run equilibrium output and selling price for each firm.
B. Now assume both firms work together to maximize industry profits. What is the equilibrium output and selling price for each firm.
C. What is the difference in profit between total profits from part A and B above?
D. Briefly explain why there is a difference in profit.
4. Alcoa Aluminum is experiencing a decrease in demand for their aluminum products. They are looking at ways to increase sales and hopefully profits. Alcoa currently sells 65,000 pounds of aluminum a year at an average price of $9 per pound. Fixed costs of producing aluminum are $225,000. Variable costs per pound are $4.75. After consulting with several of the firm's business analysts the CEO feels they can reduce variable cost by $.50 per pound if they can increase production by 10%. The analysts also feel the arc elasticity of demand for aluminum to be 1.5.
A. How much would Alcoa have to reduce the price of aluminum to increase quantity sold by 10%?
B. Calculate the firm's total revenue, total cost and total price before and after the price cut. Did the price cut achieve a result that was beneficial to the business?