Microeconomics assignment

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ECON1201.1J Assignment #2

Farzana Shaheen Due Date: November 18, 2019 _____________________________________________________________________ Note: Each student need to submit this assignment individually in class. Question #1: A) The table below provides the annual revenues and costs for a family-owned firm producing catered meals. (4 Points)

Total Revenues ($) 500 000

Total Costs ($)

- wages and salaries 200 000

- risk-free return of 6% on owners' capital of 250 000 15 000

- rent 105 000

- depreciation of capital equipment 25 000

- risk premium of 8% on owners' capital of 250 000 20 000

- intermediate inputs 150 000

- forgone wages of owners in alternative employment 80 000

- interest on bank loan 10 000

a) Calculate the explicit costs for this family-owned firm. b) Calculate the Implicit costs for this family-owned firm.

B: An electronic-parts manufacturer with U-shaped short-run cost curves is producing 10 000 units per

month and has short-run costs as follows: (16 Points)

ATC = $6.50

AVC = $4.50

AFC = $2.00

Mc = $6.90

a) At this level of output, has the firm started experiencing diminishing marginal and average

returns? How do you know?

b) At this level of output, is the firm operating below, at, or above its capacity? How do you know?

Now consider a second firm in the same industry. When it produces 10 000 units per months, its short run

costs are as follows:

ATC = $6.00

AVC = $4.50

AFC = $1.50

Mc = $3.50

a) At this level of output, has this second firm started experiencing diminishing average and

marginal returns? How do you know?

b) At this level of output, is the firm operating below, at, or above its capacity? How do you know?

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Question # 2: The Table below shows the total daily output for a firm producing specialty cakes and operating with a fixed amount of capital. The cost of labour is $100 per unit per day and the fixed cost of the capital is $1000 per day. (15 Points)

Units of Labour per day

Total Output per day

TFC TVC TC MC AFC AVC ATC

10 100

20 300

30 900

40 1320

50 1500

60 1620

70 1680

a) Using the information provided, Compute all of the short-run costs for this firm and complete the table. Remember to record the marginal cost

b) Assuming that labour is only hired in increments of 10 units, what is this firm’s capacity level of output?

c) At what level of labour employed per day does the firm encounter diminishing marginal productivity of labour?

Question # 3 A: Use the principle of substitution to predict the effect in each of the following situations.

(12 Points)

a) During the past 30 years, technological advances in the computer industry have led to dramatic reductions in the price of equipment. At the same time, real wages have increased slowly.

b) The ratio of land costs to building costs is much higher in big cities than in small cities. c) Wages of textile workers and shoe machinery operators are higher in Canada than in the southern

United States, but the price of capital equipment is approximately the same.

d) In China’s cities, wage rates for labour are rising faster than the price of capital equipment.

B: In the long-run, the LRAC curve eventually slopes upward because of diseconomies of scale. In the short- run, the SRATC curve eventually slopes upward because of the diminishing marginal product of the variable factor. (8 Points)

a) Explain the difference between diseconomies of scale and diminishing marginal of the variable

factor. Why is one a short-run concept and the other a long-run concept?

b) Draw a diagram with short-run and long-run average cost curves that illustrates for the same level

of output both diseconomies of scale and diminishing marginal product of the variable factor.

Question # 4 A: The diagram below shows the various short-run cost curves for a perfectly competitive firm.

(15 Points)

a) Based on the diagram and the assumption that the firm is maximizing its profit, fill in the table. The

last three columns require only a “yes” or “no”.

b) What is the firm’s shut-down price? Explain.

c) What is this firm’s supply curve? Explain.

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B: The diagrams below show short-run cost curves for four perfectly competitive firms. Assume that each

firm faces a market price of po. (10 Points)

a) Which firms could positive profits at some level of output?

b) Which firms would be incurring losses at their profit-maximizing level of output, but will continue

producing in the short-run?

c) Which firms will choose not to produce at price po.

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Question # 5 A: The diagram below shows the demand curve facing a single-price monopolist. The firm

is currently at point A on the demand curve, selling 20 units of output at a price of $160. (12 Points)

a) Calculate TR at each point along the demand curve, A through H.

b) Suppose the firm reduces the price from $160 to $140. Calculate the revenue it will give up on the

units it was already selling. Calculate the revenue it will gain on the new units it will sell. What is

the firm’s marginal revenue by moving from point A to point B?

c) Calculate the MR for each increment of 10 additional 10 units the firm sells, from B to C, C to D,

and so on.

d) Explain in words why the MR curve facing a single-price monopolist is different than the MR curve

facing a perfectly competitive firm.

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B: The diagram below shows a monopolist’s MC and ATC curves as well as the industry demand and MR

curves. (8 Points)

a) What is the profit-maximizing price and level of output for the monopolist?

b) What area in the figure shows the level of profits for the monopolist? Are profits positive and

negative?

c) What area shows the deadweight loss to society resulting from the monopolist’s output decision?

d) Now suppose the industry is made up of many small, price-taking firms (with the same

technology). What are the equilibrium price and level of output in this case?