EXERCISES
Lesson 1. Intro plus review concepts.
1. Complete the following table and explain the concept of consumer surplus.
5-5=0
4*2=8
3*3=9
2*4=8
1*5=5
5+4=9
5+4+3=12
5+4+3+2=14
5+4+3+2+1=15
9-8=1
12-9=3
14-8=6
15-5=10
if price is 5 and u pay 5, surplus is 0
2. An economist es mated that the cost func on of a single‐product firms is
𝐶 𝑄
230
12𝑄
8𝑄
10𝑄
Based on this informa on, determine:
a) The fixed cost of producing 7 units of output.
b) The variable cost of producing 7 units of output.
c) The total cost of producing 7 units of output.
d) The average fixed cost of producing 7 units of output.
e) The average variable cost of producing 7 units of output.
f) The average total cost of producing 7 units of output.
g) The marginal cost when Q = 7
3. A firm has a fixed produc on costs of $5,000 and a constant marginal cost of
produc on of equal to $500 per unit produced.
a) What is the firm’s total cost func on? Average cost? TC = 5000 + 500Q AC=5000+500Q / Q = 5000/Q +500
b) If the firm wanted to minimize the average total cost, would it choose to be very
large or very small? Explain.
4. Consider the following cost func on: 𝐶 𝑄
225 𝑄 𝑄 .
a) Calculate average cost, average variable cost and marginal cost.
b) Represent graphically the above cost curves.
5. You are the manager of a monopoly, and your demand and cost func ons are given
by 𝑃 225 2𝑄 𝑎𝑛𝑑 𝐶 𝑄
1100 3𝑄 , respec vely.
a) What price‐quan ty combina on maximizes your firm’s profits?
b) Calculate the maximum profits.
c) Is demand elas c, inelas c, or unit elas c at the profit‐maximizing price‐quan ty
combina on?
6. A firm sells one million units at a price of $100 each. The firm's marginal cost is
constant at $40, and its average cost (at the output level of one million units) is $90.
The firm es mates that its elas city of demand is constant at 2.0. Should the firm
raise price, lower price, or leave price unchanged? Explain.
7. A er spending 10 years and $1.5 billion, you have finally go en Food and Drug
Administra on (FDA) approval to sell your new patented wonder drug, which
reduces the aches and pains associated with aging joints. You will market this drug
under the brand name of Ageless. Market research indicates that the elas city of
demand for Ageless is 1.25 (at all points on the demand curve). You es mate the
marginal cost of manufacturing and selling one more dose of Ageless is $1.
(a) What is the profit‐maximizing price per dose of Ageless?
(b) Would you expect the elas city of demand you face for Ageless to rise or fall when
your patent expires?
8. A monopolist faces the (inverse) demand for its product: p = 50‐ 2Q. The monopolist
has a marginal cost of 10/unit and a fixed cost given by F.
a. Assume that F is sufficiently small such that the monopolist produces a strictly
posi ve level of output. What is the profit‐maximizing price and quan ty.
b. Compute the maximum profit for the monopolist in terms of F.
c. For what values of F will the monopolist’s profit be nega ve