PROBLEM SET #
2
(
4
0
points total)
INSTRUCTIONS: You must show all of your work where calculations are required and you must include a brief explanation of approximately
5
0 words for each answer to receive full credit:
1
.
Consumer Behavior and Utility (
10
pts): Below is a table showing the total utility Kim would get for consumption of various amounts (units) of three products: toy planes, trains, and automobiles. Assume that the prices are
$10
, $15, and $5 respectively, and Kim has an income of $1
6
0
.
|
Planes (price = $10) |
Trains (Price = $15) |
Automobiles (price = $5) |
|||||||||||||||||
|
Units |
Total utility (TU) |
Marg. Utility (MU) |
MU per dollar |
||||||||||||||||
| 0 |
– – |
||||||||||||||||||
| 1 |
100 |
3 00 |
60 | ||||||||||||||||
| 2 |
1 9 0 |
540 |
11 0 |
||||||||||||||||
| 3 |
2 7 0 |
720 |
150 |
||||||||||||||||
| 4 |
340 |
8 70 |
180 |
||||||||||||||||
| 5 |
400 |
990 |
205 |
||||||||||||||||
| 6 |
450 |
1080 |
225 |
||||||||||||||||
| 7 |
490 |
1140 |
235 |
||||||||||||||||
| 8 |
510 |
1170 |
240 |
Please answer the following questions. You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:
a. Fill in the columns for MU and MU/P for each of the three goods to complete the table above (4pts).
b. What is the combination of planes, trains, and automobiles Kim should choose in order to maximize her total utility? How do you know this is the utility maximizing combination? (4pts)
c. Calculate Kim’s total utility (TU) from this combination. (2pts)
2.
Production and Costs (10pts): You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:
a. Marginal and Average Product (4pts): Suppose you are given the following information for Springfield Spring Corp., a firm that produces Springfield Springs:
|
Inputs of labor |
Total Product |
Marginal Product (MP) |
Average Product (AP) |
|
12 0 |
|||
|
650 |
|||
|
860 |
|||
|
1050 |
|||
|
1200 |
|||
|
1300 |
|||
| 9 |
1350 |
||
| 10 |
1360 |
i) Fill in the columns for MP and AP to complete the table above.
ii) Does this production data illustrate the law of diminishing returns? Why or why not?
b. Short Run Production Costs (6pts): Suppose you are given the following information for the Lard Lad Donut Company. Assume Total Fixed Costs (TFC) equal $30 and Total Variable Costs (TVC) are as shown below:
|
Output (Q) |
Total Fixed Costs (TFC) |
Total Variable Costs (TVC) |
Total Costs (TC) |
Marginal Costs (MC) |
Average Fixed Costs (AFC) |
Average Variable Costs (AVC) |
Average Total Costs (ATC) |
|
$0 |
– | ||||||
|
$4 |
|||||||
|
$6 |
|||||||
|
$7 |
|||||||
| $10 | |||||||
|
$16 |
|||||||
|
$28 |
|||||||
|
$50 |
|||||||
|
$90 |
Fill in columns for TFC, TC, MC, AFC, AVC, and ATC to complete the table above. Round answers for AFC, AVC, and ATC to the nearest hundredth (i.e. show two decimal points).
3. Perfect Competition in the Short Run (10pts):
Assume Thomas Co. is a perfectly competitive firm, which produces baseball bats. Thomas company seeks to maximize profits and uses the MR=MC RULE to find its profit maximizing (or loss minimizing) level of output. Total fixed costs (TFC) for Thomas Co. are
$235
and you have the following additional cost information. You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:
|
output (Q) |
Total Costs (TC) |
Marginal Cost (MC) |
| $235 | ||
|
$300 |
||
|
$355 |
||
|
$405 |
||
|
$452 |
||
|
$500 |
||
|
$552 |
||
|
$610 |
||
|
$680 |
||
|
$760 |
||
|
$860 |
||
| 11 |
$990 |
|
| 12 |
$1,150 |
a. Fill in the column for MC to complete the table above (2pts).
b. Suppose that price is $130 (4pts).
i) What is the profit maximizing (loss minimizing) level of output for Thomas Co in the SR?
ii) Calculate the total economic profit (or loss) that Thomas Co. would receive at this particular level of output. You must show all of your work to receive full credit
iii) Should this firm continue to produce or should it shut down in the short run? Why?
c. Assume instead that price is $70 (4pts).
i) What is the profit maximizing (loss minimizing) level of output for Thomas Co in the SR?
ii) Calculate the total economic profit (or loss) that Thomas Co. would receive at this particular level of output. You must show all of your work to receive full credit
iii) Should this firm continue to produce or should it shut down in the short run? Why?
4. Monopoly (10pts): Suppose you are given the following information for Mountain WooHoo!, a monopoly which is the sole producer of high quality, highly caffeinated soda. This monopolist seeks to maximize profits and uses the MR=MC RULE to find its profit maximizing (or loss minimizing) level of output. You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:
|
Q (# cases demanded) |
P (price per case) |
Total Revenue (TR) |
Marginal Revenue (MR) |
Total Cost (TC) |
Marginal Cost (MC) |
|
$10.00 |
— |
$0.50 |
|||
|
$9.50 |
$7.50 |
||||
|
$9.00 |
$14.00 |
||||
|
$8.50 |
$20.25 |
||||
|
$8.00 |
$26.75 |
||||
|
$33.50 |
|||||
|
$7.00 |
$40.50 |
||||
|
$6.50 |
$48.00 |
||||
|
$6.00 |
$57.00 |
||||
|
$5.50 |
$68.00 |
||||
|
$5.00 |
$81.00 |
a. Write down the formulas for, and then fill in the columns for TR, MR, and MC (6pts)
b. What is the profit maximizing level of output (Q*) AND price (P*) for Mountain WooHoo! (2pts)
c. Calculate the total economic profit that Mountain WooHoo! would receive by producing at the profit maximizing output level and price. (2pts)
