Economics assignment

EC200EA

EC200: Homework 4: Due Monday, April 20th

Name: Row:_____

1. The graph below, which shows the MC, ATC, and AVC curves for a firm in the perfectly competitive pumpkin pie market. The market price of pies is $10 per pie.

a. Draw Nina’s firm demand and marginal revenue curves based on the market price of $10.

b. When the market price is $10 per pie, how many pies will Nina produce? Show that profit maximizing quantity q* in the graph above.

c. What will be Nina’s profit? Show the profit in the graph.

0

2

4

6

8

10

12

14

0 20 40 60 80 100 120 140 160

$

quantity (000s of pies)

Nina's Pumpkin Pie Company

MC

ATC

AVC

EC200EA

2. After acing their Econ 200 course, Connor and Nicholas decide to start a business (C&N Tutoring) offering economics tutoring on the Washburn Campus. First they decide that they will

need to do some advertising and buy some textbooks and markers, which works out to

approximately $20 per week. This $20 is a fixed cost since it doesn’t change with the number of

hours per week they choose to tutor. Their only variable cost is the opportunity cost of their time.

Their next best alternative to tutoring is earning $9 per hour at their jobs. However, when they

tutor more than 20 hours per week the opportunity cost of their time starts increasing, since its

means they have less time to spend with friends, studying or sleeping. They calculate their

weekly costs as the following:

C&N Tutoring

Quantity (tutoring hours per week) Fixed Cost Variable Cost Total Cost Marginal Cost

0 $20 $0 $20

1 $20 $9 $29 $9

2 $20 $18 $38 $9

3 $20 $27 $47 $9

4 $20 $36 $56 $9

5 $20 $45 $65 $9

6 $20 $54 $74 $9

7 $20 $63 $83 $9

8 $20 $72 $92 $9

9 $20 $81 $101 $9

10 $20 $90 $110 $9

11 $20 $99 $119 $9

12 $20 $108 $128 $9

13 $20 $117 $137 $9

14 $20 $126 $146 $9

15 $20 $135 $155 $9

16 $20 $144 $164 $9

17 $20 $153 $173 $9

18 $20 $162 $182 $9

19 $20 $171 $191 $9

20 $20 $180 $200 $9

21 $20 $190 $210 $9.5

22 $20 $200 $220 $10.0

23 $20 $210 $230 $10.5

24 $20 $221 $241 $11.0

25 $20 $233 $253 $11.5

26 $20 $245 $265 $12.0

27 $20 $257 $277 $12.5

28 $20 $270 $290 $13.0

29 $20 $284 $304 $13.5

30 $20 $298 $318 $14.0

EC200EA

Connor and Nicholas need to figure out what price they should charge. Their goal is to maximize their

profit. In order to determine what the demand for their services would be, they conduct a number of

surveys of their fellow students and estimate that C&N Tutoring will have the following demand:

C&N Tutoring’s Demand

Price Quantity (tutoring hours per week)

Revenue Marginal Revenue

$20.00 10

$19.50 11

$19.00 12

$18.50 13

$18.00 14

$17.50 15

$17.00 16

$16.50 17

$16.00 18

$15.50 19

$15.00 20

$14.50 21

$14.00 22

$13.50 23

$13.00 24

$12.50 25

$12.00 26

$11.50 27

$11.00 28

$10.50 29

$10.00 30

a. Complete the table by calculating the revenue and marginal revenue for each price/quantity point

on their demand.

b. What price will maximize C&N’s profit?

EC200EA

3. The graph below shows the ATC, MC, demand and MR for C&N Tutoring Services.

a. C&N’s objective is to maximize profit. What price will C&N charge for their services in order to

maximize their profits? How many hours a week will they be tutoring at that price?

b. Show the profit maximizing price (P*) and quantity (Q*) from part a. in the graph along with

C&N’s profit.

-$20.00

-$15.00

-$10.00

-$5.00

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

0 5 10 15 20 25 30 35 40

$ p

e r

H o

u r

Quantity (Hours per Week)

C&N Tutoring Services

MC

ATC

demand

MR