Name:_____Solutions_____
SE201: PRINCIPLES OF MICROECONOMICS
Assignment 9: Due Wednesday, 11/25



Make sure you show your work and that ALL answers are complete and neatly
written.
Only work that follows these instructions and represents a “Good Faith Effort” to
answer the questions posed will receive a check. (Copying answers from a classmate
without working through the problems is unacceptable conduct).
Stop by during my office hours (MW period 5, 6) if you have questions, or set up
another time to meet with me.
Read Chapters 13-14 of your textbook. Answer the following questions that cover firm
behavior and the organization of industry.
From Chapter 13 (The Costs of Production) in the textbook:
4. Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the
relationship between the number of workers and Nimbus’s output in a given day:
Workers
Output
0
1
2
3
4
5
6
7
0
20
50
90
120
140
150
155
Marginal
Product
--20
30
40
30
20
10
5
Total
Cost
$200
300
400
500
600
700
800
900
Average
Total Cost
--$15.00
8.00
5.56
5.00
5.00
5.33
5.81
Marginal
Cost
--$5.00
3.33
2.50
3.33
5.00
10.00
20.00
a. Fill in the column of marginal products. What pattern do you see? How might
you explain it?
See the table for marginal product. Marginal product rises at first, then declines
because of diminishing returns / diminishing marginal product.
b. A worker costs $100 a day, and the firm has fixed costs of $200. Use this
information to fill in the column for total cost.
See the table for total cost.
c. Fill in the column for average total cost. What pattern do you see?
See the table for average total cost. Average total cost is U-shaped. When
quantity is low, average total cost declines as quantity rises; when quantity is
high, average total cost rises as quantity rises.
d. Now fill in the column for marginal cost. What pattern do you see?
See the table for marginal cost. Marginal cost is also U-shaped, but rises steeply
as output increases. This is due to diminishing marginal product.
e. Compare the column for marginal product and the column for marginal cost.
Explain the relationship.
When marginal product is rising, marginal cost is falling, and vice versa.
f.
Compare the column for average total cost and the column for marginal cost.
Explain the relationship.
When marginal cost is less than average total cost, average total cost is falling;
the cost of the last unit produced pulls the average down. When marginal cost is
greater than average total cost, average total cost is rising; the cost of the last unit
produced pushes the average up.
From Chapter 14 (Firms in Competitive Markets) in the textbook:
6. Suppose the book-printing industry is (perfectly) competitive and begins in a longrun equilibrium.
a. Draw a diagram showing the average total cost, marginal cost, marginal revenue,
and supply curve of the typical firm in the industry.
Figure 5 shows the curves of a typical firm in the industry, with average total cost
ATC1, marginal cost MC1, and marginal revenue equal to price P1. The short-runsupply curve is the marginal cost curve above the minimum point of AVC1.
b. Hi-Tech Printing Company invents a new process that sharply reduces the cost of
printing books. What happens to Hi-Tech’s profits and the price of books in the
short run when Hi-Tech’s patent prevents other firms from using the new
technology?
The new process reduces Hi-Tech’s marginal cost to MC2 and its average total
cost to ATC2, but the price remains at P1 because other firms cannot use the new
process. Thus Hi-Tech produces Q2 units and earns positive profits.
c. What happens in the long run when the patent expires and other firms are free to
use the technology?
When the patent expires and other firms are free to use the technology, all firms’
average-total-cost curves decline to ATC2, so the market price falls to P3 and
firms earn zero profit.
Figure 5
8. A profit-maximizing firm in a competitive market is currently producing 100 units of
output. It has average revenue of $10, average total cost of $8, and fixed costs of
$200.
a. What is its profit?
Profit is equal to (P – ATC) × Q. Price is equal to AR. Therefore, profit is ($10 –
$8) × 100 = $200.
b. What is its marginal cost?
For firms in perfect competition, marginal revenue and average revenue are
equal. Since profit maximization also implies that marginal revenue is equal to
marginal cost, marginal cost must be $10.
c. What is its average variable cost?
Average fixed cost is equal to AFC /Q which is $200/100 = $2. Since average
variable cost is equal to average total cost minus average fixed cost, AVC = $8 −
$2 = $6.
d. Is the efficient scale of the firm more than, less than, or exactly 100 units?
Since average total cost is less than marginal cost, average total cost must be
rising. Therefore, the efficient scale must occur at an output level less than 100.