Question 1: Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost is comprised of the wages paid to the cooks and the food ingredients.
The variable cost associated with each level of output is given in the accompanying table.
Quantity of meals VC
0 $0
10 200
20 300
30 480
40 700
50 1,000
a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output.
|
Quantity of meals
|
FC
|
VC
|
TC
|
MC
|
AVC
|
ATC
|
|
0
|
$100
|
$0
|
|
|
|
|
|
10
|
100
|
200
|
|
|
|
|
|
20
|
100
|
300
|
|
|
|
|
|
30
|
100
|
480
|
|
|
|
|
|
40
|
100
|
700
|
|
|
|
|
|
50
|
100
|
1,000
|
|
|
|
|
b. What is the break-even price? What is the shut-down price?
c. Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?
d. Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?
e. Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?
Question 2: Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it.
a. A profit-maximizing firm should select the output level at which the difference between the market price and marginal cost is greatest.
b. An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short run.
Question 3: Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and Sophia’s, $0. De Beers’s marginal cost per diamond is $100. This leads to the demand schedule for diamonds shown in the accompanying table.
Price of diamond Quantity of diamonds
demanded
$500 0
400 1
300 2
200 3
100 4
0 5
a. Calculate De Beers’s total revenue and its marginal revenue. From your calculation, draw the demand curve and the marginal revenue curve.
|
Price of diamond
|
Qty of diamonds demanded
|
Total Revenue
|
Marginal Revenue
|
|
$500
|
0
|
|
-
|
|
400
|
1
|
|
|
|
300
|
2
|
|
|
|
200
|
3
|
|
|
|
100
|
4
|
|
|
|
0
|
5
|
|
|
b. Explain why De Beers faces a downward-sloping demand curve
c. Explain why the marginal revenue from an additional diamond sale is less than the price of the diamond
d. Suppose De Beers currently charges $200 for its diamonds.
If it lowered the price to $100, how large is the price effect? How large is the quantity effect?
e. Draw the marginal cost curve into your diagram and determine which quantity maximizes De Beers’s profit and which price De Beers will charge
Question 4: A monopolist knows that if it expands the quantity of output it produces from 8 to 9 units, that will lower the price of its output from $2 to $1.
Calculate the quantity effect and the price effect.
Use these results to calculate the monopolist’s marginal revenue of producing the 9th unit.
The marginal cost of producing the 9th unit is positive. Is it a good idea for the monopolist to produce the 9th unit?