Eco 301
Problem Set 10
Name_______________________________
20 November 2009
Please do problems 1, 3, and 4 as Excel spreadsheets. Graph AC, AVC, and MC placing the graph on the
spreadsheet page with the table (as I have done on the answer key). Turn in your spreadsheets with your
problem set. You can copy the tables from the web version of this problem set to paste into Excel.
1. The table below shows the cost data for Big Bob’s Bagel Bin (BBBB). Assume that Big Bob’s bagels
are indistinguishable from his competitors’ bagels, and that Big Bob produces and sells a tiny fraction of
the total number of bagels exchanged in the market.
Quantity
per day
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Fixed
Cost
$2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
Variable
Cost
$0.00
1.00
1.40
1.85
2.35
2.90
3.50
4.20
5.00
5.90
6.90
8.00
9.20
10.50
11.90
Total
Cost
AFC
AVC
ATC
MC
──
──
──
──
a. Complete the table.
b. If bagels currently sell for $1.00 each, how many bagels will Big Bob want to sell? What is Big
Bob’s profit?
Q = _______________
Profit = ______________
c. Since Big Bob (and probably his competitors, too) is making economic profit, one would expect
additional entry into the bagel market. How low will the price go before entry stops? At this price, how
many bagels will Big Bob sell and what is his economic profit?
P = _______________
Q = _______________
Profit = ______________
d. Suppose the price of bagels drops to $0.75 each. How many bagels will Big Bob produce? Calculate
his economic profit or loss. Why won’t Big Bob shut down in the short run?
Q = _______________
Economic Profit = ______________
2. Suppose that a perfectly competitive firm's total costs are as follows:
Output
0
1
2
3
4
5
6
7
Total Cost
10
12
15
19
24
30
37
45
Average Cost
Marginal Cost
a. If the price of the product is $5, how many units of output will a profit-maximizing firm
produce? Draw the firm's average and marginal cost curves in the graph below, and find the point
where price equals marginal cost.
b. If the price of the product is $7, how many units of output will a profit-maximizing firm
produce? Draw the firm's average and marginal cost curves in the graph below, and find the point
where price equals marginal cost.
3. The following table presents the expected cost and revenue data for Marianne’s Brief Cases.
MBC produces and sells brief cases in a purely competitive market.
a. Fill in MBC's marginal revenue, marginal cost, average variable cost, average total cost, and
profit schedules.
Output
0
1
2
3
4
5
6
7
8
9
10
11
12
13
Total
Revenue
0
150
300
450
600
750
900
1050
1200
1350
1500
1650
1800
1950
MR
Total Cost
AVC
ATC
MC
Profit
──
100
160
200
230
270
320
390
490
635
815
1015
1245
1495
1775
──
──
──
──
b. If Marianne is a profit maximizer, how many brief cases should she produce when the market
price is $150.00. Indicate Marianne's profit.
Q = _______________
Profit = ______________
c. Indicate Marianne's output and profit if the market price of brief cases rises to $200.00.
Q = _______________
Profit = ______________
d. How many brief cases will Marianne choose to sell if the market price falls to $50.00. Will
MBC continue to produce brief cases at this price? Explain.
Q = _______________
Profit = ______________
4. The following table presents the expected cost data for Phil the Florist. Phil raises flowers in a
greenhouse and sells them wholesale in a purely competitive market.
a. Fill in the firm's marginal cost, average variable cost, average total cost, and profit schedules.
Output
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
FC
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
VC
4.80
8.75
12.25
15.25
17.75
19.75
21.50
23.00
24.25
25.25
26.50
28.25
30.75
34.25
39.00
45.00
52.25
60.50
70.00
83.00
TC
AC
AVC
MC
Profit
b. If Phil is a profit maximizer, how many flowers should he produce when the market (wholesale)
price is $5.00 per dozen. Indicate Phil's profit.
Q = _______________
Profit = ______________
c. Indicate Phil's output and profit if the market price of flowers rises to $7.50 per dozen.
Q = _______________
Profit = ______________
d. How many flowers will Phil choose to sell if the wholesale price of flowers falls to $3.00 per
dozen. Will Phil continue to raise flowers at this price? Explain.
Q = _______________
Profit = ______________
5. Assume that a perfectly competitive firm has a marginal cost curve
MC = 5 + (0.1) Q
What is the firm's average variable cost (AVC) curve? If there are no fixed costs and the firm is
a profit maximizer, how much profit does it earn if the market price is P = 10? If there were
fixed costs of 25, at what price would the firm exactly break even?