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(ECON110)2009_s_quiz_econ110_129.pdf
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ECON 110
Problem Set 5 Solutions
Chapter 10: Problem 8
a. If the firm is producing where it experiences economies of scale, then by increasing its plant size the firm moves along its long-run average cost to a lower long-run average cost. As a result, the firms minimum average total cost falls with its new, larger plant size.
b. If the firm is producing where it experiences diseconomies of scale, then by decreasing its plant size the firm moves along its long-run average cost to a lower long-run average cost. As a result, the firms minimum average total cost falls with its new, smaller plant size.
c. If the firm is producing where it has constant returns to scale, then if the firm increases or decreases its plant size its long-run average cost does not change. As a result, the firms average total cost curve is the same whether or not the firm increases or decreases its plant size.
Chapter 11: Problem 2
a. Quick Copys marginal revenue equals the market price so it is 10 cents per page.
b. Quick Copys profit-maximizing quantity is 80 pages an hour.
Quick Copy maximizes its profit by producing the quantity at which marginal revenue equals marginal cost. In perfect competition, marginal revenue equals price, which is 10 cents a page. Marginal cost is 10 cents when Quick Copy produces 80 pages an hour.
c. Quick Copys economic profit is $2.40 an hour.
Economic profit equals total revenue minus total cost. Total revenue equals $8.00 an hour (10 cents a page multiplied by 80 pages). The average total cost of producing 80 pages is 7 cents a page, so total cost equals $5.60 an hour (7 cents multiplied by 80 pages). So economic profit equals $8.00 minus $5.60, which is $2.40 an hour.
Chapter 11: Problem 4
a. The market price is $8.40 per box of paper.
The market price is the price at which the quantity demanded equals the quantity supplied. The firms supply curve is the same as its marginal cost curve at prices above minimum average variable cost. Average variable cost is a minimum when marginal cost equals average variable cost. Marginal cost equals average variable cost at the quantity 250 boxes a week. So the firms supply curve is the same as the marginal cost curve for the outputs equal to 250 boxes or more. When the price is $8.40 a box, each firm produces 350 boxes and the quantity supplied by the 1,000 firms is 350,000 boxes a week. The quantity demanded at $8.40 is 350,000 a week.
b. The industry output is 350,000 boxes a week.
c. Each firm produces 350 boxes a week.
d. Each firm incurs an economic loss of $581 a week.
Each firm produces 350 boxes at an average total cost of $10.06 a box. The firm can sell the 350 boxes for $8.40 a box. The firm incurs a loss on each box of $1.66 and incurs an economic loss of $581a week.
e. In the long run, some firms exit the industry because they are incurring economic losses.