ASSIGNMENT 2

Subject: Microeconomics

Student’s name: Lê Quỳnh Anh

Student’s ID: BAFNIU18010

Class: Monday (period 1 – 3)

 Chapter 7
Problem 7. You are thinking about setting up a lemonade stand. The stand itself costs $200. The ingredients for
each cup of lemonade cost $0.50.

a. What is your fixed cost of doing business? What is your variable cost per cup?
b. Construct a table showing your total cost, average total cost, and marginal cost for output levels varying from 0
to 10 gallons.

(Hint: There are 16 cups in a gallon.) Draw the three cost curves.

Solution

a. Fixed cost = cost of the stand = $200

Variable cost per cup = ingredients for each cup of lemonade cost = $0.5

b.

Average Average Average

Quantity Fixed Variable Total Marginal
Fixed Variable Total
of gallons cost cost cost cost
cost cost cost

0 $200 $0.0 $200 ---- ---- ---- ----

1 200 8 $208 $200 $8 $208 $8

2 200 16 216 100 8 108 8

3 200 24 224 200/3 8 74.67 8

4 200 32 232 50 8 58 8

5 200 40 240 40 8 48 8

6 200 48 248 200/6 8 41.33 8

7 200 56 256 200/7 8 36.57 8

8 200 64 264 25 8 33 8

9 200 72 272 200/9 8 30.22 8

10 200 80 280 20 8 28 8
 Chapter 14
Problem 10. The market for apple pies in the city of Ectenia is competitive and has the following demand
schedule:

Price Quantity demanded

$1 1,200 pies

2 1,100

3 1,000

4 900

5 800

6 700

7 600

8 500

9 400

10 300

11 200

12 100

13 0

Each producer in the market has fixed costs of $9 and the following marginal cost:

Quantity Marginal cost

$1 $2

2 4

3 6

4 8
 5 10

6 12

a. Compute each producer’s total cost and average total cost for 1 to 6 pies.

b. The price of a pie is now $11. How many pies are sold? How many pies does each producer make? How many
producers are there? How much profit does each producer earn?

c. Is the situation described in part (b) a long-run equilibrium? Why or why not?

d. Suppose that in the long run there is free entry and exit. How much profit does each producer earn in the long-run
equilibrium? What is the market price and number of pies each producer makes? How many pies are sold? How
many pie producers are operating?

Solution

a.

Quantity Marginal cost Variable cost Fixed cost Total cost Average Total
cost

$1 $2 $2 $9 $11 $11

2 4 6 9 15 7.5

3 6 12 9 21 7

4 8 20 9 29 7.25

5 10 30 9 39 7.8

6 12 42 9 51 8.5

b. Profit of each product = Total revenue – Total cost = 5 × 11 – 39 = $16

At a price of $11, quantity demanded is 200. With marginal revenue of $11, each firm will
choose to produce 5 pies where their marginal cost is closest to the marginal revenue without exceeding
marginal revenue. Therefore, there will be 40 firms (= 200/5). Each producer will earn total revenue of
$55 ($11  5), total cost is $39, so profit is $16
c. This is not a long-run equilibrium. This is because the long-run equilibrium is where price
equals to average total cost. In the case above, price is  $11 and average total cost is
$7.80, thus in the long run more firms will enter this market until price equals to average
total cost

The market is not in long-run equilibrium because firms are earning positive economic profit.
Firms will want to enter the market

d. With free entry and exit, each producer will earn zero profit in the long run. Long-run
equilibrium will occur when price is equal to minimum average total cost ($7). At that price, 600 pies
are
demanded. Each firm will only produce 3 pies (the quantity at which, MC is closest to MR without
exceeding MR) meaning that there will be 200 pie producers in the market

Producers operating = 600 ÷ 2

= 300
It therefore means that in the long run, each producer earns a profit of $0. The
market price is $7, while at this price, 600 pies are sold in the market, and
each producer makes 2 pies , hence there are 300 producers in operation.
 Chapter 15
Problem 6. The residents of the town Ectenia all love economics, and the mayor
proposes building an economics museum. The museum has a fixed cost of $2,400,000
and no variable costs. There are 100,000 town residents, and each has the same
demand for museum visits:

QD=10− P
, where P is the price admission.

a. Graph the museum’s average-total-cost curve and its marginal-cost curve. What kind
of market would describe the museum?

b. The mayor proposes financing the museum with a lump-sum tax of $24 and then
opening the museum to the public for free. How many times would each person visit?
Calculate the benefit each person would get from the museum, measured as consumer
surplus minus the new tax.

c. The mayor’s antitax opponent says the museum should finance itself by charging an
admission fee. What is the lowest price the museum can charge without incurring
losses? (Hint: Find the number of visits and museum profits for prices of $2, $3, $4, and
$5.)

d. For the break-even price you found in part (c), calculate each resident’s consumer
surplus. Compared with the mayor’s plan, who is better off with this admission fee, and
who is worse off? Explain.

e. What real-world considerations absent in the problem above might provide reasons to
favor an admission fee?

Solution

a. The museum is a natural monopoly because there are no other substitutes

availablefor it in town and because is has fixed costs . As shown in the graph ,
this mean the museums marginal costs are 0 and its average total costs decrease
as more people attend.
b. If the price were free each person would visit the museum 10 times . To
calculateth the consumer surplus we create a triangle using the marginal cost
and demand . This createsa triangle with a geight of 10 and length of 10 , the
consumer surplus is 50 50 – 24 = 26
c. We will begin by calculating the revenue the museum will generate at 2,3,4, and
5 dollars . We do thus by first determining how many times each person will visit
at each price , then multiplying this value by the cost per ticket and finally
multiplying by the population of the town
P=2
(10-2) x 2 x 100,000 = 1,600,000
P=3
(10-3) x 3 x 100,000 = 2,100,000
P=4
(10-4) x 4 x 100,000 = 2,400,000
P=5
(10-5) x 5 x 100,000 = 2,500,000
At a price of 4 dollars a ticket the amount of revenue the museum will collect
equals its costs and the museum will break even.
d. Each resident will pay 4 dollars and go to the museum 6 times . This means edges
of the triangle used to calculate the value of consumer will each be 6 . The
length will be 6 because that is the quantily demanded , the height will be 6
because it is the difference in amount they are willing to pay and amount they
are paying (10-4 ) . Therefore the consumer surplus will be 18 . This is a smaller
consumer surplus than is created if the museum were to be funded by tax
money .
e. In the real world it is unlikely that everyone in Entenia has the same interest in
an economics museum and therefore some would be unhappy about paying taxes
for a museum don’t plan on visiting.
 Chapter 16
Problem 7. Consider a monopolistically competitive market with N firms. Each firm’s
business opportunities are described by the following equations:

Demand: Q = 100/N − P,

Marginal Revenue: MR = 100/N − 2Q,

Total Cost: TC=50+Q2

Marginal Cost: MC = 2Q

a. How does N, the number of firms in the market, affect each firm’s demand curve?
Why?

b. How many units does each firm produce? (The answers to this and the next two
questions depend on N.)

c. What price does each firm charge? d. How much profit does each firm make?

e. In the long run, how many firms will exist in this market?

Solution

a. In order to determine how the number of firms will affect the demand curve we can
use the given demand equation given . The horizontal intercept of the demand curve is

100
going to be and recall that N is the number of firms . As the number of firms(N)
N
increases , the horizontal intercept becomes smaller and smaller
With this in mind we can infer that the demand curve will shift to the left if the
number of firms inreases.
b. If we want to determine what quantity each firm will produce we need to find the
profit maximizing point . Recall that when marginal cost and marginal revenue are
equal thus is considered to be the point of profit maximizatoin . We can take the two
given equations , equate them and solve for Q
 100
– 2Q = 2Q
N

100
=4 Q
N

100
=Q
4N

25
=Q
N

25
Quantity =
N

c. To find the price we can solve for P in the given demand equation because we now
know the profit maximizing quantity thanks to (b).

25 100
= −P
N N

100 25
P= −
N N

100−25
P=
N

$ 75
P=
N

d. Finding the profit each firm makes will require a new basic quation :
Profit = Total revenue – Total cost
We already have the total cost formula and total revenue is just going to be price
multipplied by quantity , both of which we found earlier in this problem.
75 25 25 2
Profit = x −50+( )
N N N
1875 625
Profit = 2
−50− 2
N N
1250
Profit = −50
N2
e. We know that firms in the long run make zero profit . This can help us determine how
many firms will exist in long run . We can use our new profit formula in order to
determine how many firms will exist by setting profit to 0 and solving for N
1250
0= −50
N2
1250
50 =
N2
25
1=
N2
25 = N 2
 Chapter 17
Problem 7. A case study in the chapter describes a phone conversation between the
presidents of American Airlines and Braniff Airways. Let’s analyze the game between the two
companies. Suppose that each company can charge either a high price for tickets or a low
price. If one company charges $300, it earns low profit if the other company also charges $300
and high profit if the other company charges $600. On the other hand, if the company charges
$600, it earns very low profit if the other company charges $300 and medium profit if the other
company also charges $600.

a. Draw the decision box for this game.

b. What is the Nash equilibrium in this game? Explain.

c. Is there an outcome that would be better than the Nash equilibrium for both airlines? How
could it be achieved? Who would lose if it were achieved?

Solution

a. The decision box for this scenario is posted below . AA represents

American Airlines , and BA represents Braniff Airways . Low price is the $300 ticket and high price is
the $600 ticket
Low price High price

AA: Low profits AA: Very low profits

BA:Low prfits BA: High profits

AA: High profits AA: Medium profits

BA: very low profits BA: Medium profits

b. In order to find the Nash equilibrium we need to determine what the dominant
strategy is for both firms . For Braniff , if AA choose the low price BA is better off
choosing the low price as well . If AA choose the high price , Braniff is better off
choosing the low price.
This means that the dominant strategy for Braniff is to select low price

For American Airlines , If BA choose the high price , they are better off choosing low
price . If BA choose the low price they are also between off choosing the low price .

So the dominant strategy for AA is to choose the low price

With all of this in mind , we know that the Nash equilibrium is when both airlines choose
the low price

c. There is an outcome better than the Nash equilibrium that we just found . If both
airlines set their prices high then they both will earn medium profits . In order for this
to happene , both airlines would have to cooperate and agree to set their prices high

If this agreement were achieved , the loser would be the consumer who buys the
airlines ticket
 Chapter 21
Problem 11. Daniel is a diligent student who loves getting A's but he also loves watching movies.
Daniel is awake of 100 hours each week, and studying and watching movies are his only two
activities. Daniel must study for 20 hours per week for each A he earns. each movie is 2 hours long.
a) Draw Daniel's budget constraint that shows the trade-off between the number of A's he can
receive and the number of movies he can watch. Assuming he is happiest when he earns three A's ,
draw an indifference curve that marks his optimal choice of studying and movie watching. How many
movies does he watch each week?
With a new semester beginning, Daniel decides to get his difficult requirements out of the way . Each
class now require him to study for 25 hours each week to get an A
b) Draw the new budget constraint on your graph. Show one possible outcome on your diagram.
How will the relative strengths of the income and substitition effects determine wether Daniel makes
better or worse grades and wether he watches more or fewer movies?

Solution
a)