Business & Finance HOMEWORK

NU: ECO 203 Homework assignment #3 for week 3 and week 4: (Total of 60 points)

Suppose you supply good X in a perfectly competitive market. To sell good X you rent a building for $30,000 per month and rent a machine for $20,000 per month. Those are your fixed costs. The variable cost per month is given in the table below: (12 points total)

Quantity of good X	Variable Cost (VC)	Average Variable Cost (AVC)	Average Total Cost (ATC)	Marginal Cost (MC)
0	$0
1,000	$5,000
2,000	$8,000
3,000	$9,000
4,000	$14,000
5,000	$20,000
6,000	$33,000
7,000	$49,000
8,000	$72,000
9,000	$99,000
10,000	$150,000

a) Use blank spaces in the table above to calculate your average variable cost, average total cost, and marginal cost for each quantity of good X. (0.2 for each correct cost value = 6 points total)

b) There is free entry into this market, and anyone who enters will face the same costs as you do. If current market price of one unit of X is $27. Calculate your total profit? $ _______ (2 points)

c) What is the long-run price of good X? (2 points)

d) What is the break-even price ( Where economic profit = $0)? Briefly explain. (2 points)

2. Graph below shows costs, price (vertical axis) , and quantity of good X (horizontal axis ) for firm A operating in a perfectly competitive market. (8 points total)

a. Firm A’s approximate profit-maximizing level of output when price is $80? ________Q. (2 points)

b. Firm A’s total profit or loss when price $40 $ __________. (2 points)

c. Firm A’s Average Fixed Cost at 5 units of X is $__________. (2 points)

d. Firm A’s Total Fixed Cost at 4 units of X is $_____________. (2 points)

3. Diagram illustrates your local electricity company (a monopoly). It shows the demand for kilowatt-hours (kWh) of electricity, the company’s marginal revenue (MR), its marginal cost (MC), and its average total cost (ATC). The government may regulate the monopolist by imposing a price ceiling. (8 points total)

a) If the government does not regulate this monopolist, what price will it charge? Briefly explain: $ __________ (2 points)

b) If the government imposes a price ceiling equal to the marginal cost $0.20, will the monopolist make profits or lose money? Briefly explain. (2 points)

c) If the government imposes $0.10 price ceiling, how much kWh will the firm produce? Briefly explain: (2 points)

d) If the government imposes a price ceiling of $0.30, will the monopolist make a profit, lose money, or break even? Briefly explain: (2 points)

4. Externalities : (2 points)

What does it mean to internalize an externality? Provide an example.

2: Factor (labor) market: (0.25 for each correct cost value = 3 points total)

Jane runs a nursery. The more nursery workers she hires, the more flowers she can grow and sell. But because the size of her nursery is limited, each additional worker adds less to her output of flowers. The accompanying table shows Jane’s production function per month. Each flowerpot can be sold at an average price of $40. Calculate MPL and VMPL for each worker.

Number of nursery workers	Number of flowerpots per month	Marginal Product of Labor (MPL): Additional flowerpots per month	Value of Marginal Product of Labor: VMPL, per flowerpot per month
0	0	N/A	N/A
1	80
2	150
3	210
4	260
5	300
6	330

Determine Jane’s labor demand schedule for each of the following monthly wage rates for nursery workers: (1 point each = 6 points)

Monthly Wage Rate	Number of nursery worker(s) demanded
$1,100	?
$1,500	?
$1,900	?
$2,100	?
$2,900	?
$3,300	?

3. Jake is an enthusiastic amateur boxer and spends a lot of his free time working in the gym. He also works at a nursery evaluating quality of plants. Because the nursery business is going through a difficult time, the hourly wage rate jake can earn has fallen. Jake decides to spend more time working at the nursery and less time at the gym. Explain his decision in terms of either income or substitution effect. (3 points)

5. Using the monopoly graph below : (8 points total)

--1. Identify the price and output combination that results in zero economic profit (breaking even): Price = _____________. Output = ______________,

--2. Determine the price and output combinations in the absence of regulation for this monopoly: Price = ______________. Output = ___________,

5. Diagram below shows domestic U.S. supply and demand for good X. World price is $1,000. (2 points each = 10 points)

a. With free international trade, how many units of good X will the U.S. import? __________

Suppose the U.S. government now imposes a tariff on good X as shown on the graph.

b. How many units of good X will the U.S. import after tariff is imposed? _____________

c. Calculate government’s revenue as the result of the tariff $_____________

d. With international trade restriction, how many units of good X will the U.S. consumers demand? __________

e. With free international trade, how many units of good X will the U.S. suppliers supply? ___________

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