Econ722 Tutorial 4 Solutions.doc

YOU MUST ATTEMPT THESE QUESTIONS BEFORE TUTORIAL CLASS WHERE WE WILL SHARE SOLUTIONS. YOU ARE EXPECTED TO HAVE DONE THE RECOMMENDED READING IN ORDER TO ANSWER SOME OF THESE. 1. (a) Complete the following table of costs for a firm. (Note: enter the figures in the MC column between outputs of 0 and 1, 1 and 2, 2 and 3, etc.) Output TC (￡) AC (￡) MC (￡) 0 1 2 3 4 5 6 7 8 9 10 55 85 110 130 160 210 280 370 480 610 760 – 85 55 43.3 40 42 46.7 52.9 60 67.8 76 30 25 20 30 50 70 90 110 130 150 (b) Referring to the data above, draw the firm’s average and marginal cost curves on the diagram. (Remember to plot MC mid-way between the quantity figures.) (c) Assume that the firm is a price taker and faces a market price of ￡60 per unit. Draw the firm’s AR and MR curves on the above diagram. (d) What quantity it will produce in order to maximise profit? (also label on diagram)………. 5 units, where MC = MR….. (d) What is the amount of profit made? (also shade on diagram)…………………………….. TR – TC = (5 ( ￡60) – (5 ( ￡42) = ￡300 – ￡210 = ￡90 2. A perfectly competitive industry for peanut butter has a short-run supply curve of QSRS = 1,000P – 4,000. The demand curve for this industry is P = 10 – 2Q/1000. (Use the graph template below to sketch the market demand supply curves to help you). Draw-in curves using 2 points: Demand: When Q = 0, P = 10 - 2(0)/1,000 = 10 When Q = 4,500, P = 10 – 2(4,500)/1,000 = 1 Supply: When Q = 0, 0 = 1,000P – 4,000 4,000 = 1,000P P = 4,000/1,000 P = 4 When P = 9, Q = 1,000(9) – 4,000 = 5,000 Calculate the equilibrium price and quantity (and show on graph)? Supply: QSRS = 1,000P – 4,000 Demand: P = 10 – 2Q/1,000 Equilibrium where Qd = Qs Re-arrange Demand into Q = … P = 10 – 2Q/1,000 2Q/1,000 = 10 – P 2Q= 10,000 – 1,000P