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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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