Econ 211
Problem Set 4 Answers

1. $139,250 ($99,000 in explicit costs plus $40,250 in implicit costs).

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?

4. I'll let you ponder this one.

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.

6. Here's the table:

Output TC ATC MC
50 $50,000 $1000.00 --
51 $52,000 $1019.61 $2000
52 $53,976 $1038 $1976
53 $58,976 $1112.75 $5000

7. Review the widget lab experiment to answer this question.

8. Here's the table:

Bodies Embalmed TC FC VC ATC AVC AFC MC
0  24 24 0 -- -- -- --
1  40 24 16 40 16 24 16
2  74 24 50 37 25 12 34
3  108 24 84 36 28 8 34
4  160 24 136 40 34 6 52
5  220 24 196 44 39.20 4.80 60
6 282 24 258 47 43 4 62

9. Review your notes for this one.

10. We did this one in class.

11. We did this one in class.

12. Your coffee mug company should reduce its output below 200 units per month (since at 200 units we know that your P < MC). Even though you will still be losing money, it is better than temporarily shutting down.

13. Competitive Firm:

Q P TR MR TC FC VC MC ATC AVC Profit
0 8 0 8 300 300 0       -300
100 8 800 8 900 300 600 6 9.0 6.0 -100
200 8 1600 8 1300 300 1000 4 6.5 5.0 300
300 8 2400 8 1500 300 1200 2 5.0 4.0 900
400 8 3200 8 1600 300 1300 1 4.0 3.3 1600
500 8 4000 8 2000 300 1700 4 4.0 3.4 2000
600 8 4800 8 2600 300 2300 6 4.3 3.8 2200
700 8 5600 8 3300 300 3000 7 4.7 4.3 2300
800 8 6400 8 4400 300 4100 11 5.5 5.1 2000

d) If price fell to $3, the firm would (temporarily) shut down and not produce any output since P = $3 is below the minimum AVC.

14. 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).

15. Think about the following string of equalities: P = MR = MC = ATC.

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

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

18. We did this one in class.

19. I'll leave this one for you to ponder...

20. 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.

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

22. I'll leave this one for you to ponder.

23. 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.

24. Two words: Entry barriers.

25. TR = $2000; TC = $1200; Profit = $800; The monopolist should not change its price and output because of the imposition of the lump sum tax--it's a fixed cost. Profits are simply reduced to $500.

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

27. We did this one in class.

28. Miata.

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.