# Economics

UMGC – Landstuhl y Rota+ Economics 203

Fall (ii) 2020 Exercise Set 5

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**Exercise Set 5 (25 points; 10 points individual, 10 points class bonus)**

**Last Name, First Name:**

**Individual Score: (- = + /15**

**Class Score: + /10**

**Total Score: + /25**

1. Question #1 Score = (- ) = + / 3.0

A small Italian manufacturer produces *lampade da tavola *(table lamps) in a perfectly competitive market.

(a) Fill in the missing values in the Table below. **Round to 1 decimal place! **(1 point ; .1 per row)

(Answer in Table below.)

Output per Week | Total Costs = TC | AFC | AVC | ATC = AC | MC |

0 | 100 | ——— | ——- | ——– | ——– |

1 | 150 | ||||

2 | 175 | ||||

3 | 190 | ||||

4 | 210 | ||||

5 | 240 | ||||

6 | 280 | ||||

7 | 330 | ||||

8 | 390 | ||||

9 | 460 | ||||

10 | 540 |

(b) Suppose the equilibrium price in the *lampade da tavola *market = $60. How many *lampade da tavola *will the manufacturer produce? (1 point) (-

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(c) Given your answer to (b), what is the amount of the manufacturer’s economic profit? (1 point) (-

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(d) If the price were $30, should the manufacturer shut down? Why or why not? (.5 points) (-

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2.** **Suppose you grow *Spargel (*asparagus in German*) *and sell* *it by the box in a highly competitive market with a per-box price of €6*.* Your cost curves are shown below. (2 points; .6 points per question)

Question #2 Score = (- ) = + /3.0

MC

AC

Price

6

5

4

3

2

1

2 4 6 8 10 12 14 16 17 20 22 24 quantity (000s)

(a) How many boxes of *Spargel *will you produce? (-

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(b) Given your answer to (a), calculate your total profit or loss and illustrate it in the diagram above. (-

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(c) Assuming all other *Spargel *producers have the same MC and AC curves, would you expect more or fewer competitors in the future? (-

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(d) Given your answer to (c), will the market per-box *Spargel *price rise or fall? Why? (-

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(e) What will be the long-run per-box price of *Spargel*? How much will each *Spargel *grower produce? (-

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3. Question #3 Score = (- ) = + / 3.0

(a) Use the cost information in the table below to calculate average variable cost and average cost, assuming fixed cost = $350. Then use these calculations to answer the questions that follow. (.6 points) (-

(Answer in Table below)

q | Fixed Cost = FC | Variable Cost = VC | Average Variable Cost = AVC | Average (Total) Cost = AC |

10 | $350 | $100 | ||

20 | $350 | $180 | ||

30 | $350 | $240 | ||

40 | $350 | $300 | ||

50 | $350 | $450 | ||

60 | $350 | $630 | ||

70 | $350 | $840 |

For each of the questions below, assume that the firm only produces in units of 10, i.e., don’t worry about other values of q in between those shown.

(b) At or above which price would this firm produce and sell output in both the short and long run. Explain. (.6 points) (-

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(c) Below which price would this firm would want to produce and sell output in neither the short run nor the long run. Explain. (.6 points) (-

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(d) Is there a price at which this firm (or any firm) would want to produce and sell output in the long run but not the short run? Explain. (.6 points) (-

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(e) Between what range of prices would this firm want to produce and sell output in the short run but not the long run, i.e., mínimum AVC vs. Minimum AC? Explain. (.6 points) (-

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4. Question #4 Score = (- ) = + / 3.0

Refer to the graphs below to answer each of the questions that follow. Assume the market for the highest-quality Spanish cured ham (*jamón serrano pata negra*) is in equilibrium where D = S . Further, for simplicity, assume that the AC cost for the typical firm represents the appropriate short-run curve consistent with the optimal scale of output at its mínimum point. (By the way, it takes a unique combination of weather and land populated with groves of oak and cork trees that produce the right acorns that the pigs eat while grazing to produce this super high-quality product.)

Assume further that we begin in long-run equilibrium (**i.e., the equilibrium market price in the market, identifiable in the left-hand graph, equals minimum long-run average cost, identifiable in the right-hand graph**) that all firms have similar cost curves; and that this is a **constant-cost** industry, which means that as firms enter the market, input prices are **constant**. (3 points; .6 points per question)

**Market** **Typical Firm**

MC

MC

MMC

P

P

P

AC

S

P1

P1

D

q1

Q1

q

Q

(a) Referring to the market diagram above (the one on the left), show and explain what happens to the equilibrium market price and quantity sold in the European market for Spanish cured ham (*jamón serrano*) if European tastes change in favor of Spanish cured ham and away from Italian *Prosciutto*. Of course, we’re assuming that Spanish cured ham is produced only in Spain, but consumed throughout Europe. (-

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(b) Referring to the typical-firm diagram above (the one on the right), show and explain what the new profit maximizing level of output would be at the **new **market-equilibrium price you identified. (Simply draw a dotted line from the new equilibrium price in the market graph over to the appropriate curve in the typical-firm graph and identify the new profit-maximizing level of q for the typical firm.) (-

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(c) Referring to the typical-firm diagram above, identify whether the firm at the new profit-maximizing level of output is earning a profit or a loss. How do you know this? (-

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(d) Refer again to the market diagram (on the left) above. Given your answer to (c), explain what will happen to the market supply curve, i.e., will it shift? If so, which way? Will the final market equilibrium price be higher, lower, or the same as before? (-

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(e) If this were, instead, an increasing-cost industry, which it most likely is, by the way, how would your answer to (d) change? (-

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5. Question #5 Score = (- ) = + / 3.0

Don’t panic! This is not difficult. Simply follow the instructions. (An equation or two will help you understand the meaning of all of this. Besides you had an introduction in Quiz 4, question #9!)

Suppose the market for T-shirts in Catania, Sicily, is perfectly competitive and that the Price of a T-shirt is $20. Assume further that a typical producer in this market has the following total cost and marginal cost functions:

TC = 500 + .1 q2

From this TC equation, we can show that the MC is as follows:

MC = .2q

Where q = quantity produced.

(a) What part of the TC function represents fixed costs? (That is, when q = 0, what is the level of Total Costs? This number, then, corresponds to fixed cost.) (-

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(b) So what would be the algebraic expression for the firm’s Average Total Cost (AC). (Remember, AC = TC / q; so simply divide 500 + .1q2 by q. (-0)!

Answer**: **AC = 500 / q +.1 q2 / q = **500 / q + .1 q**

(c) Compute the number of T-shirts the firm produces to maximize profits. (Set P = MC; i.e., set $20 = .2q and solve for q!) (-

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(d) What is the AC (Average Total Cost) at the profit-maximizing quantity of T-shirts? (-

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(e) What is the Average Variable Cost (AVC) of producing the profit-maximizing quantity of T-shirts?

(Remember: AC = Average Fixed Cost + Average Variable Cost = AFC + AVC. So from the answer shown to (b) above, what is the expression for AVC?) (-

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Will the firm continue to operate or shut down? (-

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(f) Calculate the firm’s economic profit or loss at its profit-maximizing level of output, q. (-

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