Intermediate Microeconomics
Chapter 9 and 14
Ch. 9: 2, 6, 11
Ch 14: 1, 2, 5, 12
Ch 9
9.2
In many cases, an author gets paid a percentage of total revenue. If this is so, the author
would prefer a price that maximizes total revenue. This price will be the price where MR
= 0. The publisher would prefer a price that maximizes profit. This will be the price
where MR = MC. In the case of an electronic book, where the marginal cost of production
is almost zero, the publisher would be satisfying the same condition that the author would
want satisfied, MR = 0. Therefore, in this case, the author and the publisher are likely to
agree on the right price and sales quantity. The lower the marginal cost of production, the
more alike their preferences.
9.6
The solution must satisfy the quantity rule:
P = MC
243 = 3Q2
81 = Q2
Q=9
If the fixed cost is unavoidable, we have to compare revenue from production to the
variable cost of production and make sure that revenue is greater. The revenue from
producing and selling nine units is $243×9 = $2,187. The variable cost from producing
nine units is Q3, or (9)3, which is $729. The revenue is greater than the variable cost and
producing leaves the firm $1,458 better off than if it did not produce, so producing nine
units is the best choice.
If the fixed cost is avoidable, then we compare revenue ($2,187) to the sum of variable
costs ($729) and fixed cost ($3,000). Total cost is $3,729. This is greater than revenue; if
the firm produces, its best possible profit is –$1,542. The firm is better off producing
nothing in this case, earning a profit of zero.
Another way to look at it is to realize that, whether the fixed cost is avoidable or not, the
actual profit from producing nine units is –$1,542. If the fixed cost is unavoidable, the
profit from not producing is –$3,000, which makes producing a better choice. If the fixed
cost is avoidable, the profit from not producing is $0, making not producing a better
choice.
9-1
9.11
If it costs a firm $2 to produce each unit of its output, then MC = 2. If price is greater than
$2.00, the quantity rule that P = MC will never be satisfied because price will always be
greater than marginal cost. In this situation, the firm would want to produce an infinite
number of units in order to
maximize profit. If the price were
lower than $2, then the quantity
rule could never be satisfied
because marginal cost would
always be greater than the price.
This firm would not be willing to
produce anything at price lower
than $2. If the price were exactly
equal to $2, the firm would be
willing to produce any amount
that buyers were willing to buy.
The firm would be indifferent
between producing and not
producing.
The supply curve would be a
horizontal line at the price of $2.
At prices below $2, quantity supplied would be equal to zero.
Ch 14: 1, 2, 5, 12
14.1
At prices above $4, no one wants to
buy ice cream. At prices below $4,
both Juan and Emily want to buy ice
cream. Therefore,
JUAN's demand
MARKET demand
4.5
when P  $4

when P  $4
The sum of Juan’s and Emily’s
demand functions is (10 – 2.5P) + (6
– 1.5P) = 16 – 4P. Substituting the
demand functions into the expression
for Qd above gives:
EMILY's demand
5
4
3.5
Price ($)
d
d
QJuan
 QEmily
Q 
0
d
Individual and Market Demand Curves
3
2.5
2
1.5
1
0.5
0
0
5
10
Quantity of Ice Cream Cones
9-2
15
20
16  4 P when P  $4
Qd  

when P  $4
0
14.2
At prices below $1.50, no one wants to sell ice cream. At prices above $1.50 but below
$2, only Anitra will sell ice cream. At prices higher than $2, both Anitra and Robert will
sell ice cream. Therefore,
0
 s
Q  Q Anitra
s
Q s
 Anitra  QRobert
s
when P  $1.50

when $1.50  P  $2
when P  $2

The sum of Anitra’s and Robert’s supply functions is (6P – 4) + (4P – 8) = 10P – 12.
Substituting the supply functions into the expression for Qs above gives:
0

Q  6 P  4
10 P  12

s
when P  $1.50

when $1.50  P  $2
when P  $2

When students draw these supply curves, be sure that they have drawn Anitra’s correctly;
her supply curve does not touch the Price axis. At a price of $1.50, she produces 5 units
and at prices below that, 0.
Individual and Market Supply Curves for Ice
Cream
ANITRA's Supply Curve
ROBERT's Supply Curve
MARKET Supply Curve
3
2.5
Price ($)
2
1.5
1
0.5
0
0
5
10
15
Quantity of Ice Cream Cones
9-3
20
14.5
Long-run market supply curve with free entry is a horizontal line at the minimum of AC,
which we can find by setting AC equal to MC. First we need AC, which is just C(Q)
divided by Q plus the fixed cost divided by Q. AC = 4 + Q/40 + 10/Q.
MC = AC
Q
Q 10
4
 4

20
40 Q
Q 10

40 Q
Q2 = 400
Q = 20
The minimum of AC occurs when Q = 20. Plugging this into AC (or MC) yields a
minimum AC of $5. So the long-run market supply curve is the horizontal line P = $5.
14.12
If total cost falls by $1 at every level of output regardless of the level of output, this is
basically a $1 reduction in fixed costs. Since fixed costs are not considered in the short
run (they do not affect marginal cost), nothing would happen to the equilibrium price or
the equilibrium output from the firms in the short run. The only change would be that the
currently active firms now enjoy $1 in profit.
In the long run, this profit would inspire outside firms to enter the market. Price would
fall to be $1/Q less than it was previously. There would be more firms, with each firm
producing a little less than before, (although total production would be higher) and a
lower equilibrium price.
9-4