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ECON 247: Assignment 2A
79.5%
Due Date: After you have completed Unit 10
Credit Weight: 10% of your final grade
1.
A firm that is hiring labour (L) and capital (K) competitively is selling its product (Q) in
a competitive market as given in the following table. The price of a product Q is $4. Each
worker costs $20 and each capital costs $5.
L
0
1
2
3
4
5
6
7
8
K
4
4
4
4
4
4
4
4
4
Q
20
37
51
62
70
75
77
76
MPL
0
20
17
14
11
8
5
2
-1
VMPL
0
80
68
56
44
32
20
8
-4
a. 2/2 Complete the columns of Marginal Product of Labour (MPL) and Value of the
Marginal Product of Labour (VMPL) in the above table.
(2 marks)
Answer: see above
b. 3/3 How many workers will the firm hire? Explain why?
(3 marks)
Answer: From the table above, coincidentally, moving from 5 workers to 6 workers the Value of
the Marginal Product per Labor (VMPL) is $20. For this additional one worker
the company has to paid $20 to this worker which is equal to the VMPL. Hence,
the firm will hire 6 workers because that is where the wage rate = VMPL
c.
1/ 2Calculate the maximum profit that this firm will earn.
(2 marks)
Answer: TR = units produced x price = 75 units x $4 = 300
L = number of workers x rate = 6 worker x $20= 120
C = capital employed x capital rate = 4 capital (fixed at every level) x $5 = 20 Hence
irrelevantneed to include TFC = 5*4 =
TC = L only = 120
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Profit = TR – TC = 300 – 120 = 180160
d. 4/ 5 Unemployment has gone up due to the COVID-19 pandemic. As a result, the
wage rate has fallen from $20 to $8. Recalculate the number of workers this firm
will now hire and its maximum profit.
(5 marks)
Answer: The new wage rate of $8 falls spot on where the VMPL = $8 on the table above.
Hence, they will hire 7 workers producing 77 unitsyes
TR = units produced x price = 77 units x $4 = 308
L = number of workers x rate = 7 worker x $8= 56
TC = L only = 56TFC = 5*4 =
Profit = TR – TC = 308 – 56 = 252232
2.
8/8How do the following factors shift the demand for labour or the supply of labour
curve? Also indicate what would happen to the equilibrium wage rate and equilibrium
quantity of labour. (Assume everything else is constant in each case).
(2 marks each)
a.
The price of product X that these workers are producing increases.
Answer: As the price of product X increases, suppliers of the product will want to produce more
hence demand for labor will increase. It will shift the demand curve for labor to
the right. Equilibrium wage rate and the quantity of labor will increase.
b.
Due to the COVID-19 pandemic, workers are not able to come to Canada for
work.
Answer: it will decrease the supply of labor hence the labor supply will shift left.
o Equilibrium wage rate will increase
o Quantity of labor will decrease
c.
Workers now enjoy more leisure hours.
Answer: it will decrease the supply of labor hence the supply of labor will shift left
o Equilibrium wage rate will increase
o Quantity of labor will decrease
d.
Capital becomes cheaper and labour and capital are substitutes.
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Answer: Business will be replacing labor with capital hence the demand for labor will decrease
shifting the demand curve for labor left.
o Equilibrium wage rate will decrease
o Quantity of labor will also decrease
3.
A competitive firm is selling its product. The price for its product is $8. Round off your
answers to two decimal places.
a.
8/8Complete the TC, AFC, AVC, ATC, MC, TR, MR, and profit columns in the
table below.
(8 marks)
Total
product
0
1
2
3
4
5
6
7
8
9
10
b.
TFC
TVC
TC
AFC
AVC
$10
$10
$10
$10
$10
$10
$10
$10
$10
$10
$10
$0
$7
$12
$21
$40
$75
$132
$217
$336
$495
$700
10
17
22
31
50
85
142
227
346
505
710
0
10
5
3.33
2.5
2
1.67
1.43
1.25
1.11
1
0
7
6
7
10
15
22
31
42
55
70
ATC
0
17
11
10.33
12.5
3
23.67
32.43
43.25
56.11
71
MC
TR
MR
Profit
0
7
5
9
19
35
57
85
119
159
205
0
8
16
24
32
40
48
56
64
72
80
0
8
8
8
8
8
8
8
8
8
8
-10
-9
-6
-7
-18
-45
-94
-171
-282
-433
-630
5/5At what price and output level will the above firm maximize its profit or
minimize its loss? Should this firm continue to sell in the short run? Should it
continue to sell in the long run? Explain your answer.
(5 marks)
Answer:
o P = MC = MR. At output level 2 the firm should maximize its profit.
o P>AVC, hence, this firm should continue to sell in short run because the price is greater
than the minimum AVC i.e., is the shutdown price.
o No, it should not continue to sell in the long run because the price is less than its
Minimum ATC which is its exit level.
ECON247v11_Assignment_2A
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c.2/2 Based on the table, what is the important relationship between ATC and
MC?
(2 marks)
Answer:
o When MC decreases, ATC is decreasing, and MC lies below ATC.
o When ATC is minimum, MC=ATC and MC intersect ATC from below at its minimum.
o When ATC is increasing, MC rises and remain above ATC.
4.
6/6Explain three phases of a long-run average total cost curve.
(6 marks)
Answer: The shape of the long-run average-total-cost curve conveys important information
about the production processes that a firm has available for manufacturing a good. In
particular, it tells us how costs vary with the scale—that is, the size—of a firm’s
operations.
1. When long-run average total cost declines as output increases, there are said to be
economies of scale.
2. When long-run average total cost rises as output increases, there are said to be
diseconomies of scale.
3. When long-run average total cost does not vary with the level of output, there are said
to be constant returns to scale (pg295, Mankiw, Kneebone, & McKenzie, 2020)
5. 1/ 6 What long-run effect will an increase in market demand have on an increasing-cost
industry (an upward-sloping long-run supply curve)?
(6 marks)
Answer: In the long run supply will be less and demand will be more resulting in a short fall in
supply. This is because the increasing cost industry will continue to increase supply,
hence the supply curve will shift to the right as the industry is constantly trying to catch
up with demand.
See Figure 14.9 on P. 292/317
Increased demand – higher price/profits – new firms enter market – increased supply –
downward pressure on price/profits
6.
In a monopoly market, suppose the linear MC intersects MR at 15 units of output. At this
level of output, MR and MC are $2. The price that the monopolist charges is given as $5.
MC also intersects the linear demand curve at 25 units of output. At this level, P and MC
are $3. The price is $11 when demand is zero.
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a.
2/2Calculate the monopolist’s total revenue if the monopolist charges a single
price.
(2 marks)
Answer: TR = P x Q = $5 x 15 units = 75
b.
Calculate the monopolist’s total revenue if the monopolist uses perfect price
discrimination.
(4 marks)
Answer: In this case P = MC = $3
TR = P x Q = $3 x 25 units = $75
0/4 0.5(11-3)*25+3*25 =
c.
2/2Calculate the deadweight loss if the monopolist charges a single price.
marks)
(2
Answer: The deadweight loss (DWL) if the monopolist charges a single price is Area of triangle
= ½ x B x H = ½ x (5-2) x (25-15) = $15
(the lowest price at 15 units is $2)
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7.
a.
4/4Complete the following table that shows the costs and revenues of a
monopolist.
(4 marks)
Total
product
0
1
2
3
4
5
6
7
8
9
10
Price
TR
MR
TC
MC
Profit
30
28
26
24
22
20
18
16
14
12
10
0
28
52
72
88
100
108
112
112
108
100
0
28
24
20
16
12
8
4
0
-4
-8
$8
$22
$34
$50
$76
$118
$182
$274
$400
$566
$778
0
14
12
16
26
42
64
92
126
166
212
-8
6
18
22
12
-18
-74
-162
-288
-458
-678
b.2/2 Determine the profit-maximizing level of output. What is the maximum profit?
(2 marks)
Answer: The maximum profit from the table above is $22 hence profit -maximizing level of
output is 3 units.
c.
1.5/2Determine the level of output where TR is maximized. What is the maximum
value of TR?
(2 marks)
Answer:
o The total output level is 7 & 8 unitsalways produce at highest output level - Q=8
o The maximum value of TR is $112
d.
Why is the profit not maximized when total revenue is maximized?
(2 marks)
Answer:
0/2 When TR maximized, MC>MR and MR = 0
o Revenue maximization involves reducing prices to increase the total number of sales
o Whereas profit maximization requires a business to sell its products and services at the
highest possible profit margin by either reducing cost or increasing prices
o Therefore, profit is not maximized because at maximum revenue total cost is higher thus
minimal profit.
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8.
2/ 3What do areas B, C, and D represent in the following diagram? The monopolist
produces at Qm and charges a price Pm. A perfectly competitive firm produces at Qc and
charges a price Pc.
(3 marks)
Answer:
 Area C shows the consumer surplus when monopolist produce (below the MR curve and above the
price)

Area D shows the total loss of surplus by consumers resulting from a monopolyDWL

Area B shows the cost to society of increasing output from Qm to QcDWL
ECON247v11_Assignment_2A
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9.
The following table provides the number of haircuts per day (Q), the price (P), and the
total cost (TC) data for a local barbershop.
a.
4/4Complete the following table. Round your answers in the ATC column to two
decimal places.
(4 marks)
Q
1
2
3
4
5
6
7
8
P
70
69
68
67
66
65
64
63
TR
70
138
204
268
330
390
448
504
MR
0
68
66
64
62
60
58
56
TC
95
164
222
275
330
390
454
522
MC
0
69
58
53
55
60
64
68
ATC
95
82
74
68.75
66
65
64.86
65.25
b.4/4 What is the profit-maximizing price and output? Is this a long-run equilibrium?
Why or why not?
Answer:

The profit maximizing price is $ 65 and the profit maximizing output is 6 units where
the marginal cost curve intersects the marginal revenue curve.

This this is considered as a long run equilibrium because at this quantity, average
revenue curve is equal to average total cost curve.
(4 marks)
c.
In what type of market must the barbershop be operating? Why?
The firm is operating in a monopolistic form of market where the average revenue
curve is falling and the marginal revenue curve is also falling but it is lower than
the average revenue curve while in perfect competition the marginal revenue
curve and the average revenue curve are equal.
0/2 monopolistic competition – due to downward sloping demand curve and P=ATC
(2 marks)
10.
3/ 6Describe the two characteristics of the long-run equilibrium in a monopolistically
competitive market. Explain why a monopolistically competitive firm will produce at less
than the efficient scale in the long run.
Answer:
ECON247v11_Assignment_2A
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Two characteristics of the long-run equilibrium in a monopolistically competitive market:
1) Selling price equals’ average total costyes and P>MC
2) Marginal revenue equals marginal cost
A monopolistically competitive firm in the long run will produce at less than the efficient
scale:
Although P=ATC, ATC is not at its minimum due to downward sloping demand curve – see P.
292
This is because a good is always priced higher than its marginal cost, a monopolistically
competitive market can never achieve productive or allocative efficiency. Suppliers in
monopolistically competitive firms will produce below their capacity.
(6 marks)
11.
The data for two firms (Firm 1 and Firm 2) are given below. There is no fixed cost.
P
45
40
35
30
25
20
15
10
a.
Q
1
2
3
4
5
6
7
8
TR
45
80
105
120
125
120
105
80
MR
0
4535
25
15
5
-5
-15
-25
TC
10
20
30
40
50
60
70
80
MC
0
10
10
10
10
10
10
10
4/4Complete the above table.
Profit
35
60
75
80
75
60
35
0
(4 marks)
b.2/2 If the market were perfectly competitive, what would the price and quantity be?
Answer: Perfectly competitive firm maximizes profit where P = MC.
We can see that at Q = 8, P = MC = 10.
So, P = 10 and Q = 8.
(2 marks)
c.4/4
If the two firms collude and form a cartel, what is the joint profit-maximizing
level of output and price?
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Answer:
Cartel maximizes profit where MR equals or just exceeds MC. We can see that
MR exceeds MC until Q = 4 and after that MR < MC.
So, P = 30 and Q = 4.
(4 marks)
d.2/2 If the two firms split the market evenly, what would be Firm 1’s production and
profit?
Answer:
Firm 1's production, Q = 4/2 = 2 at P = 30. TC = 20
Profit = TR - TC = P*Q - TC = 30*2 - 20 = 60 - 20 = 40
So, firm 1 produces 2 units and profit = 40.
(2 marks)
e.
3/ 4What would happen to Firm 2’s profit if it increased its production by one unit
while Firm 1 stuck to the cartel agreement?
Answer:
Firm 2's output, Q = (4/2) + 1 = 2 + 1 = 3
Profit = TR - TC = P*Q - TC = 3025*3 - 30 = 90 - 30 = 6045
So, firm 2's profit will be higher.
(4 marks)
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