Introduction to Microeconomics – L1 EG – University of Orleans
Tutorial 7
Exercise1. Consider a firm with the following cost function
CT=aY² + bY + constant
1- How do the curves of AC, AVC and MC move if the fixed costs increase?
2- How do the curves of AC, AVC and MC move if the variable costs increase?
Exercice2. Consider a firm operating in perfect competition, producing at a loss. Suppose that the price of the
produced good increases. What should the firm do in order to maximize the profit?
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The managers should keep the level of production unchanged, because in such a way the costs would be
constant, and benefit of the increase of total revenues.
The managers should increase the level of output because this would increase both the total cost and the
total revenue.
The managers should reduce the level of output, because this decreases the total costs.
Exercise3. Consider a firm characterized by the following long term cost function:
CT = 50Y3-200Y2+300Y
1- Suppose that the price is 150. Which is the firm’s supply?
2- Suppose that the market demand is Yd=600*(10-Px). How many firms are there on the market? (each firm
has the same cost function)
3- Which is the firm’s profit?
4- Which is the observed long term price?
5- How many firms are there on the market?
Among the firms existing in this market, one has just had a probably innovative idea, which allows producing the
good at the following cost:
CT=2Y3 - 35Y² + 220Y
6- Assume that the firm decides to produce by means of this technology. Which would the price be?
7- Which would the level of production be?
8- Should the firm adopt the new technology?
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