Problem Set dr. Bob Horn
1. Suppose a firm has the cost function C = 600 + 3q + 6q2. This implies
that MC = 3 + 12q.
(a) what is the firm's variable cost function?
(b) what are the firm's fixed costs?
(c) what is the firm's average cost function?
(d) if the market price is $101, how many units will the firm produce?
What will happen in the long run?
(e) at what price and output level will this firm just break even, i.e. earn
earn zero economic profit?
2. Why would a firm that incurs losses choose to produce rather than shut down? Use a diagram to support your answer.
3. Why is the market demand curve downward sloping in a competitive market while the individual firm's demand curve is perfectly elastic?
4. Suppose you are the manager of a watch making firm operating in a competitive market. Your cost of production is given by C = 100 + q2.
(a) if the price of a watch is $60, how many should you produce to
maximize profits?
(b) what will the profit level be?
(c) at what minimum price will the firm produce a positive output?
5. The world producer price for baseballs
is $ 24 per dozen, and almost all of them are produced outside the
QD = 100,000 – 2,000 P and the
(a) If the
(b) Under free trade, what is the
(c) Suppose Congress imposes a tariff of $ 6 per dozen on baseball imports. What are the new equilibrium price, domestic consumption, domestic production and imports?
(d) Determine the losses to US consumers, gains to US producers and the deadweight loss.