FRAMINGHAM STATE COLLEGE
PRINCIPLES OF MICROECONOMICS
PROBLEM SET NUMBER 10
My Name is? ________________________________________
Using the material covered in CHAPTER 14.
1.
Your roommate's long hours in Chemistry lab finally paid off. She has discovered a secret
formula that lets people do an hour's worth of studying in minutes. So far, she's sold 200 doses,
and faces the following average-total-cost schedule:
Quantity Average Total Cost
199
$199
200
$200
201
$201
If a new customer offers to pay your roommate $300 for one dose, should she make one more?
Explain
Since a new customer is offering to pay $300 for one dose, marginal revenue between 200 and 201 doses
is $300. So we must find out if marginal cost is greater than or less than $300. To do this, calculate total
cost for 200 doses and 201 doses, and calculate the increase in total cost. Multiplying quantity by average
total cost, we find that total cost rises from $40,000 to $40,401, so marginal cost is $401. So your
roommate should not make the additional dose.
2.
Consider total cost and total revenue given in the table below:
Quantity
0
1
2
3
4
5
6
7
Total Cost
$8
$9
$10
$11
$13
$19
$27
$37
Total Revenue
$0
$8
$16
$24
$32
$40
$48
$56
Profit
-$8
-$1
$6
$13
$19
$21
$21
$19
a.
Calculate profit for each quantity and insert the values in the table.
b,
How much should the firm produce to maximize profit?
The firm should produce 5 or 6 units to maximize profit.
c.
Calculate marginal revenue and marginal cost for each quantity. Graph them. (Hint: Put the
points between whole numbers. For example, the marginal cost between 2 and 3 should be
graphed at 2 1/2.) At what quantity do these curves cross? How does this relate to your
answer to part (a)?
Marginal revenue and marginal cost are graphed in Figure 1. The curves cross at a quantity between 5 and
6 units, yielding the same answer as in part (a).
Principles of Microeconomics
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Problem Set Number 10
d.
Can you tell whether this firm is in a competitive industry?
This industry is competitive since marginal revenue is the same for each quantity.
If so, can you tell whether the industry is in a long-run equilibrium?
The industry is not in long-run equilibrium, since profit is positive.
Figure 1
Principles of Microeconomics
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Problem Set Number 10