ECON 180 - Regulation and Antitrust Policy Drake University, Spring 2013 William M. Boal Course page: www.cbpa.drake.edu/econ/boal/180 Blackboard: bb.drake.edu Email: william.boal@drake.edu

Competitive Firms

### Version A

I. Multiple choice [3 pt each: 24 pts total]

(1)b. (2)a. (3)b. (4)f. (5)a. (6)b. (7)a. (8)d.

II. Problems

(1) [Profit maximization: 20 pts]

1. MR(Q) = 15 - (Q/10).
2. Firm does not take price as given because marginal revenue is not constant--it depends on the firm's own output level Q.
3. MC(Q) = 3 + (Q/20).
4. Set MR=MC and solve to get Q*=80.

(2) [Profit maximization while taking price as given: 10 pts]

1. Find MC(Q) as dTC/dQ. Set MC(Q)=P=9 and solve to get Q*=400.
2. Profit = Revenue - TC(Q). Since price is taken as given at \$9, revenue = \$9 × 400 = \$3600. TC(400) = \$2800. So profit = \$800.

(3) [Short-run cost curves and supply: 20 pts]

1. \$1 = MC(700).
2. \$12 thousand = SATC x 1500.
3. \$8 = minimum SATC.
4. \$2 = minimum SAVC.
5. 1600 flashlights (using rule P=MC).
6. profit because price > breakeven price.
7. 1400 flashlights because price < breakeven price.
8. loss because price < breakeven price.
9. zero flashlights because price < shutdown price.
10. loss equal to SFC.

(4) [Long-run cost and supply: 20 pts]

1. MC(q) = dTC/dq = 3 q2 - 200 q + 2520.
2. AC(q) = TC/q = q2 - 100 q + 2520.
3. Breakeven price = minimum AC. So set derivative of AC equal to zero and solve to get qES=50. Then substitute AC(50) = \$20 = breakeven price.
4. Given the assumptions, long-run industry supply is a horizontal line at minimum AC = \$20.

III. Critical thinking [6 pts]

We are asked to find SFC, which equals SAFC × Q. Now SAFC = SATC - SAVC. At Q=1000, for example, SATC = \$10 and SAVC = \$2, so SAFC = 10 - 2 = \$8. Therefore, SFC = \$8 × 1000 = \$8000. (Calculations at different values of Q should result in an identical final answer for SFC.)

### Version B

I. Multiple choice [3 pt each: 24 pts total]

(1)a. (2)d. (3)c. (4)f. (5)b. (6)c. (7)c. (8)a.

II. Problems

(1) [Profit maximization: 20 pts]

1. MR(Q) = 17 - (Q/10).
2. Firm does not take price as given because marginal revenue is not constant--it depends on the firm's own output level Q.
3. MC(Q) = 2 + (Q/20).
4. Set MR=MC and solve to get Q*=100.

(2) [Profit maximization while taking price as given: 10 pts]

1. Find MC(Q) as dTC/dQ. Set MC(Q)=P=13 and solve to get Q*=800.
2. Profit = Revenue - TC(Q). Since price is taken as given at \$13, revenue = \$13 × 800 = \$10400. TC(800) =\$7200. So profit = \$3200.

(3) [Short-run cost curves and supply: 20 pts]

1. \$13 = MC(700).
2. \$10 thousand = SATC x 900.
3. \$7 = minimum SATC.
4. \$4 = minimum SAVC.
5. 1600 flashlights (using rule P=MC).
6. loss because price < breakeven price.
7. zero flashlights because price < shutdown price.
8. loss equal to SFC.
9. 1900 flashlights.
10. profit because price > breakeven price.

(4) [Long-run cost and supply: 20 pts]

1. MC(q) = dTC/dq = 3 q2 - 160 q + 1630.
2. AC(q) = TC/q = q2 - 80 q + 1630.
3. Breakeven price = minimum AC. So set derivative of AC equal to zero and solve to get qES=40. Then substitute AC(50) = \$30 = breakeven price.
4. Given the assumptions, long-run industry supply is a horizontal line at minimum AC = \$30.

III. Critical thinking [6 pts]

We are asked to find SFC, which equals SAFC × Q. Now SAFC = SATC - SAVC. At Q=1000, for example, SATC = \$10 and SAVC = \$5, so SAFC = 10 - 5 = \$5. Therefore, SFC = \$5 × 1000 = \$5000. (Calculations at different values of Q should result in an identical final answer for SFC.)