Introduction to Microeconomics – L1 EG – University of Orleans
Tutorial 5
Exercise 1. We analyze the costs of a firm by means of the following example. We asked her to indicate the total cost
associated to different levels of production:
Y
1
2
3
4
5
6
7
8
9
10
CT
58
88
92
94
100
120
154
205
280
400
where Y represents the level of production and CT the corresponding total cost. The firm’s fixed costs are 20 euros.
Compute the average costs (AC) for each level of production.
Compute the variable costs (VC), the average fixed costs (AFC) and the average variable costs (AVC).
Compute the marginal costs (MC) associated to each level of production.
Draw the average costs and the marginal costs in a graph with the level of production on the horizontal axis
and the average and marginal costs on the vertical axis.
5- Fill a column of the provided table with the firm’s revenues when the price of the output is 20 euros.
6- Compute, for each level of production, the profits when the price is 20 euros.
7- Which is the optimal production when the price is equal to 20?
8- Compute, for each level of production, the profit when the price is 34. Which is the optimal level of
production?
9- Same question for a price equal to 51.
10- Which is the break-even price for this enterprise? And the break-even point?
11- Indicate the break-even price on your graph and plot the firm’s offer curve.
1234-
Exercise 2. Consider a firm operating in a perfectly competitive market. Her costs are represented by the following
function:
CT=
10
3
Y3 – 25Y2 + 100Y +500
1- Give the expressions of the marginal cost, the average cost, the average variable cost and the average fixed
cost.
2- Which is the supply (produced quantity) when the price is equal to 233 euros? Which is the corresponding
profit?
3- Plot the functions of the average cost, marginal cost and average variable cost (you can use Excel). Print
more copies of this plot: you will use them for questions 4, 7, 8, 9, 10, 11, 12.
4- Draw on your graph the total revenue, the total cost, the profit, the fixed cost and the variable cost when
the price is 233.
5- COMPUTE (don’t use the graph) the firm’s supply when the market price is 100. Same question when the
price is 50. Which are the corresponding profits?
6- In question 5 you realized that the firm loses money. Should she shut the production down?
7- Estimate the break-even price and the break-even point. Compute the shutdown price.
Suppose now that the firm gets some market power, through some strategies which are not moral, so as she faces
now the following negatively sloped demand:
1
Yd = 14 –
14
500
Px
8- Draw this demand function and the marginal revenue in your graph.
9- Which are the optimal production, price and profit?
10- The government obliges the firm to behave as in perfect competition. Which would be the level of
production, the price and the profit?
11- Which is the size of surplus that the firm would lose once she fixes the perfectly competitive price?
12- Compute the price, the production and the profit under the case of average-cost pricing.
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