6 Microeconomic homework questions on free markets, monopolies, and oligopolies. instructions are in the attachment below. you may do it digitally if you can put graphs.

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Microeconomics – ECII-UF 102

David Lamoureux

Page 1 of 4

Spring 2019

Assignment 3 – Market Structures

Due: Wednesday, May 8

Instructions: These problems are based on the material from Krugman and Wells’

Microeconomics, 5th edition. A paper copy is due at the start of class, Wednesday, May 8. You

may discuss the questions and concepts with classmates and others, but you cannot show your

answers to them. Students must turn in their own work. Assignments of more than one page in

length must be stapled. Show all your calculations for full credit.

Chapter 12

1. The Seaside Ice Cream Company produces and sells ice cream on the boardwalk at the

ocean. The company pays $900 per month to rent the building where it is located and rents

the equipment it uses for $100 per month. These are their fixed costs. The firm’s monthly

variable costs are listed in the following table.

Quantity of

Variable

Ice Cream

Costs

(pints)

0

$0

100

$400

200

$600

300

$700

400

$1,000

500

$1,600

600

$2,500

700

$3,800

800

$5,600

900

$8,000

1000

$11,100

a) Calculate the company’s average variable cost, average total cost, and marginal cost for

each quantity of output.

b) Assume that this is a perfectly competitive industry. If the price of a pint of ice cream is

$9, what will the Seaside Ice Cream Company’s profit be? Explain. Is this a long-run

equilibrium? If not, what will the price of a pint of ice cream be in the long run? Explain.

c) What is the ice cream company’s shutdown price? Explain why this is the shutdown price

and what this means.

d) What is the firm’s break-even price? Explain.

e) Suppose the price of a pint of ice cream is $2.50. What is the profit maximizing quantity

of output that the company should produce? What will the total profit be? Will the

company produce or shut down in the short run? Will it stay in the industry or exit in the

long run? Explain your answers.

Microeconomics – ECII-UF 102

David Lamoureux

Page 2 of 4

Spring 2019

2. A profit-maximizing business incurs an economic loss of $30,000 per month. Its fixed cost is

$20,000 per month.

a) Should this firm produce or shut down in the short run? Explain. Should it stay in the

industry or exit in the long run? Explain.

b) Suppose instead that this business has a fixed cost of $35,000 per month. Should it

produce or shut down in the short run? Explain. Should it stay in the industry or exit in

the long run? Explain.

Chapter 13

3. Vacation Island has only one hotel on the entire island. The demand schedule for a room at

the hotel is given below.

Price per night,

per room

$250

$225

$200

$175

$150

$125

Quantity

demanded

0

1

2

3

4

5

a) Calculate the hotel’s total revenue and its marginal revenue. From your calculation, draw

the demand curve and the marginal revenue curve.

b) Explain why this hotel faces a downward-sloping demand curve.

c) Using the total costs given in the table below, calculate the hotel’s marginal costs and add

the marginal cost curve to your diagram from part a. Show your calculations.

Quantity

(number of room

rentals)

0

1

2

3

4

5

Total Cost

$100

$125

$200

$325

$500

$725

d) Use marginal analysis to determine the profit maximizing number of room rentals.

Explain. How much profit will the hotel earn, if it rents the profit-maximizing quantity of

rooms? Show your calculation.

e) What price will the hotel charge for a room? Explain.

Microeconomics – ECII-UF 102

David Lamoureux

Page 3 of 4

Spring 2019

Chapter 14

4. In a small European country, the soda market is controlled by two firms, Tastee Pop and

Fizzo. Each of these firms has fixed costs of €500 (that is, five hundred euros), and constant

marginal costs of €6 per bottle of soda (this means that each additional bottle produced adds

six euros to the total cost.) The market demand schedule for soda in this country is given in

the table below.

Price of soda

(per bottle)

10 €

9€

8€

7€

6€

5€

4€

3€

2€

1€

Quantity of soda demanded

(thousands of bottles)

0

1

2

3

4

5

6

7

8

9

a) Suppose the two firms form a cartel and act as a monopolist. Calculate marginal revenue

for the cartel. Use marginal analysis to determine the monopoly price and output. Explain

how you arrived at this output and price. Assuming the firms divide the output evenly,

how much will each firm produce and what will their profits be? (Show your calculations

for full credit.)

b) Now suppose Fizzo decides to increase production by 1,000 bottles and Tastee Pop

doesn’t change its production. What will the new market price and output be? What is

Fizzo’s profit? What is Tastee Pop’s profit?

c) What if Fizzo increases production by 2,000 bottles (from part a) and Tastee Pop still

doesn’t change its production. What would Fizzo’s output and profits be relative to those

in part b?

d) What do your results tell you about the likelihood of cheating on such agreements?

Chapter 15

5. The textbook describes three different forms of product differentiation.

a) Briefly explain each of the three forms of differentiation.

b) Based on these three forms of differentiation, explain how a pizza restaurant could

differentiate itself from its competitors.

Microeconomics – ECII-UF 102

David Lamoureux

Page 4 of 4

Spring 2019

c) Suppose that the market structure for pizza restaurants in New York City is monopolistic

competition. Draw a diagram showing an individual firm in this market, if these

restaurants are earning economic profits. Explain your diagram.

d) Will the situation described in part c be sustained in the long run, in this market? Explain.

Chapter 16

6. Define the following terms give an example of each.

a) Negative externality

b) Positive externality

…

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