Econ 211

2. The relevant hiring criterion should be a comparison of the marginal benefits of adding a worker versus the marginal costs of adding a worker. If the MB > MC, then it makes sense to hire the worker. Diminishing returns has nothing to do with this. Diminishing returns simply means that the additional worker is not generating as many marginal benefits as the previous worker.

3. What is the rule for determining the profit maximizing number of cars to sell? Does fixed costs enter into that equation?

5. Sunk costs should be ignored. As long as the MB > MC, the project should continue. In this case, the MB of completing the project are the (still) unrealized gains of $15 billion. The MC of completing the project are X and unknown. Thus, as long as the X < $15 billion, the project should continue.

Labor	Average Product	Marginal Product
1	1	1
2	1.5	2
3	2	3
4	2.5	4
5	3	5
6	3.5	6
7	3.7	5
8	3.75	4
9	3.67	3
10	3.5	2

d) For output rates just below 30 boats, which is equivalent to a little less than 8 workers per week, the MP > AP, and the AP rises.
e) For output rates just above 30 boats, which is equivalent to a little more than 8 workers per week, the MP < AP, and the AP falls.

Output	TC	VC	FC	ATC	AFC	AVC	MC
1	1400	400	1000	1400	1000	400	400
3	1800	800	1000	600	333	267	200
6	2200	1200	1000	367	167	200	133
10	2600	1600	1000	260	100	160	100
15	3000	2000	1000	200	67	133	80
21	3400	2400	1000	162	48	114	67
26	3800	2800	1000	146	38	108	80
30	4200	3200	1000	140	33	107	100
33	4600	3600	1000	140	30	109	133
35	5000	4000	1000	143	28	114	200

I'll leave it to you to recalculate the costs after FC increase to 1100. You should note, however, that MC will be unaffected by this change.

Output	TC	ATC	MC
50	$50,000	$1000	--
51	$52,000	$1019	$2000
52	$53,976	$1038	$1976
53	$58,976	$1112	$5000

16. Short run curves get their shapes from the productivity curves (which are governed by the concept of diminishing returns in the short run). The long run average cost curve gets its shape from the concept of economies of scale (which involves a proportionate change in all resources).

18. This is similar to #23 below except that it refers to an decreasing cost industry.

19. a) The firm will produce where P = MC. Since P = 10 cents, MC is 10 cents at approximately 80 pages per hour. (b) TR is $8 per hour. TC is about $5.6 per hour. Profits are about $2.40 per hour.

20. a) profit maximizing output is 4 pizzas per hour.
b) The shutdown price is equal to the minimum AVC which, in this case, is $10.
c) The firm's supply curve is that part of their MC which lies above the shutdown point. In this case, Pat's supply curve consists of the following price/quantity pairs: P= 11, Q =3; P=13, Q=4; P=15, Q=5.
d) Pat leaves the pizza industry if P < ATC. Thus Pat will not operate if P is lower than the lowest ATC which, in this case, is $13.50.
e) Entry occurs if P > ATC. Thus, any price above $13.50 will attract entry.
f) The long run equilibrium price is $13.50.

21. a) The market price of a cassette is determined by the intersection of the market demand and the market supply curves. The market demand is given in the problem. The market supply curve equals the sum of the individual supply curves for the 1000 firms in the industry. Each firm's supply curve is its MC curve above the AVC curve. From the cost structure of the firms in the market, the firm and market supply curves are as follows:

Price (equals MC)	Firm Supply Curve	Market Supply Curve (1000 x firm supply curve)
7.00	250	250,000
7.65	300	300,000
8.40	350	350,000
10.00	400	400,000
12.40	450	450,000
12.70	500	500,000

The market supply curve equals 1000 times the individual supply curve. Combining the market supply curve with the market demand curve, the equilibrium price is $8.40.
b) Equilibrium industry output is 350,000 cassettes per week.
c) Each firm produces 350 cassettes per week.
d) The firm's economic profit is calculated as (P-ATC)(q), which in this case is (8.40-10.06)(350) = -$581. Each firm is making an economic loss of $581.
e) The shutdown point is a price of $7 per cassette.
f) Long run equilibrium price is $10.
g) At a price of $10 per cassette, 300,000 cassettes are demanded, and at $10 per cassette each firm produces 400 cassettes. Hence 750 firms remain in the industry.

22. Think about the difference between accountants and economists in terms of defining profits.

23. We did this one in class (although I didn't exactly refer to the situation as the beer market)..

25. Price discrimination could be beneficial to the economy in the sense that it encourages the monopolist to eliminate dead weight loss by selling to more customers. The three conditions are in your notes.

26. Price discrimination:
a) those who do not own a boat
b) adults
c) business travelers
d) rich

28. If you treat the Mafia as a crime monopolist, then we would predict that the Mafia has incentives to restrict the amount of crime in order secure greater profits. In other words, the Mafia may be able to erect entry barriers to prevent small-time hoods from engaging in too much criminal behavior.

32. Since MC > MR, the monopolist should cut output (and thereby raise its price).

33. The profit maximizing output (where MR = MC) is Q = 50 and the price is P = 55. The firm earns profits of $1450 at this output/price combination. The lowest price the firm would be willing to operate at is $17.50.

Q	P	TR	MR	MC	FC	VC	TC	PROFIT
1	50000	50000	50000	10000	50000	10000	60000	-10000
2	40000	80000	30000	10000	50000	20000	70000	10000
3	30000	90000	10000	10000	50000	30000	80000	10000
4	20000	80000	-10000	10000	50000	40000	90000	-10000
5	10000	50000	-30000	10000	50000	50000	100000	-50000

b) A single-price monopolist maximizes profit by selling Q = 3 (where MR = MC) at a P = $30,000. Profits are $10,000.
c) A price discriminating monopolist has an incentive to sell to all those who are willing to pay above the MC. Thus, the firm will sell to all 5 buyers (that last buyer will be indifferent) at the maximum price each is willing to pay. Thus TR=$150,000 and profits will be $50,000.

35. Parkin #1:
a) Q = 150 newspapers per day.
b) P = 70 cents
c) TR = $105
d) Demand is price elastic. Only when the demand is price elastic is the MR > 0. Because MC is always greater than zero, in order for MC to equal MR, the demand must be elastic.

36. Parkin #5:
a) Q = 2 and P = 6
b) MC = 4
c) MR = 4
d) Profit = 5
e) Minnie's is not efficient since they are producing at a point where P > MC. This means that society would be better off if output is expanded to a point where P = MC (in which case the DWL is eliminated).