Solution|: MBAA/523 Problem Set 5

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MBAA 523 Problem Set 5 

1.    For each of the following market structure characteristics, insert the correct Market Type(s). There may be more than one. Use these abbreviations:  PC – perfect competition; MC – monopolistic competition; and M – monopoly.

 

Market Structure Characteristic

Market Type

Advertising is not effective for the individual firm.

 

MR<D

 

The seller is a price-taker.

 

Neither an individual buyer nor seller can affect the market demand and supply curves.

 

Long-run economic profits are possible.

 

In long run equilibrium, each supplier produces where SRATC and LRATC are at a minimum.

 

Advertising is used extensively.

 

In equilibrium, P = MR = MC.

 

Profits are maximized at the output where MR = MC

 

P>MR

 

Product is unique.

 

In equilibrium, products cannot be produced at a lower cost or sold at lower price.

 

Economies of scale are often a barrier to entry.

 

Products have many close substitutes.

 

 

2.    Assume a perfectly competitive market structure. Complete the diagram to show the profit maximizing price and quantity. Label each (use Insert textbox). Is the firm earning economic profits or losses?  If so, what will occur over the long-term? 

 

 

3.  A firm sells its product in a perfectly competitive market where other firms charge a price of $80 per unit. The firm’s costs are C(Q) = 40 + 8Q + 2Q2. Show your computations.

a. How much output should the firm produce in the short-run?

b. What price should the firm charge in the short-run?

c. What are the firm’s short-run profits?

d. What adjustments should be anticipated in the long-run?

 

4. Complete the diagram showing the profit maximizing price and quantity. Label each. Show and label the deadweight loss (In MS Word, use Insert/Curved Connector, a curved line).

 
  

 

 

5. A firm is a monopoly with demand and cost functions given by P = 200 – 2Q and C(Q) = 2,000 + 3Q2respectively. Show your computations.

a. Show the equations for MR and MC.

b. Compute the profit maximizing quantity.

c. What is the price at the profit maximizing quantity?

d. Compute total revenue.

e. Compute total cost.

f. What are the profits? 

 

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