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BECN 100 Take-Home Assignment Due on July 15, 2010 • You can complete this assignment as a group of up to 5 students. • Total available mark for this assignment is 40. • I will not accept any late assignments. PART I (32 Marks) 1. A recent study found that the demand and supply schedules for Frisbees are as follows: (6 Marks) Price per Frisbee Quantity Demanded Quantity Supplied ($) (million) (million) 11 1 15 10 2 12 9 4 9 8 6 6 7 8 3 6 10 1 a) What are the equilibrium price and quantity of Frisbees' b) Frisbee manufacturers persuade the government that Frisbee production improves scientists’ understanding of aerodynamics and thus is important for national security. A concerned Parliament votes to impose a price floor $2 above the equilibrium price. What is the new market price' How many Frisbees are sold' c) Irate students march on Ottawa and demand a reduction in the price of Frisbees. An even more concerned Parliament votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price' How many Frisbees are sold' 2. Use the following table to answer this question. Price Units of Output Total Cost (dollars) (quantity demanded) (dollars) 10 200 2,000 9 260 2,275 8 325 2,550 7 405 2,825 6 480 3,100 The demand and total cost schedules of a monopolist are presented in the table above. What price should a profit-maximizing monopolist charge' (4 Marks) 3. Consider the following table of long-run total cost for three different firms: (4 Marks) Quantity 1 2 3 4 5 6 7 Firm A 60 70 80 90 100 110 120 Firm B 11 24 39 56 75 96 119 Firm C 21 34 49 66 85 106 129 Does each of these firms experience economies of scale or diseconomies of scale' 4. Your roommate’s long hours in Chem lab finally paid off-she discovered a secret formula that lets people do an hour’s worth of studying in 5 minutes. So far, she’s sold 200 doses, and faces the following average-total-cost schedule: (4 Marks) Q Average Total Cost 199 $199 200 200 201 201 If a new customer offers to pay your roommate $300 for one dose, should she make one more' Explain. 5. The licorice industry is competitive. Each firm produces 2 million strings of licorice per year. The strings have an average total cost of $0.20 each, and they sell for $0.30. (4 Marks) a. What is the marginal cost of a string' b. Is this industry in long-run equilibrium' Why or why not' 6. Bob’s lawn-mowing service is a profit maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob’s short-run decision regarding shutdown and his long-run decision regarding exit' (6 Marks) 7. At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces, and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1000 units. What is the firm's current profit' What is likely to occur in this market and why' (4 Marks) PART II (8 Marks) 1. Coach Ballford: “To increase our revenue from football games, we need to lower ticket prices.” University President Smith: “Coach, that would be counterproductive, a reduction in ticket prices would reduce our revenue, not increase it.” Which of the following best explains this disagreement' A. The coach thinks that demand is elastic, while the university president thinks that demand is inelastic. B. The coach thinks that demand is inelastic, while the university president thinks that demand is elastic. C. The coach believes that lower ticket prices will increase attendance, but the university president must not believe attendance will increase when prices are lowered. D. While both the coach and the president believe demand is of unitary elasticity, they disagree about how much attendance will rise. 2. The cross elasticity of demand between goods X and Y is negative. A decrease in the price of good Y will A. decrease demand for good X because goods X and Y are substitutes. B. decrease demand for good X because goods X and Y are complements. C. increase demand for good X because goods X and Y are substitutes. D. increase demand for good X because goods X and Y are complements. 3. The chart below presents the schedule of total costs for Sharpie’s Pencil Company. Number of Pencils Produced Total Cost (dollars) 100,000 200 110,000 5,800 120,000 6,500 Beyond 110,000 units, the per-unit marginal cost of producing an additional 10,000 pencils is A. 5 cents. B. 5.5 cents. C. 6 cents. D. 7 cents. 4. Use the table below to answer the next question. Units of Output Total Cost (dollars) 100 11,000 200 20,000 300 29,400 400 39,500 500 50,500 The schedule of total costs for a chair-manufacturing firm is presented in the table above. If the market price of chairs is $100, which output should this price-taker firm produce to maximize profit' A. 200 B. 300 C. 400 D. 500 5. A firm competing in a price-searcher market with low barriers to entry A. cannot determine the price of its product; the price will be set solely by market forces. B. can set the price of its product, but market forces then determine the quantity sold. C. can set the quantity sold and the price of the product but not the profit level. D. cannot set either the quantity sold or the price of the product. 6. Price searchers can be expected to charge a price that A. is the highest at which consumers will purchase any units. B. they expect to provide the largest possible flow of gross revenue. C. minimizes their per-unit costs of production. D. maximizes their profit. 7. Any firm can increase profits by expanding output A. until revenue is large enough to cover costs. B. until costs are reduced by enough to match revenues. C. as long as marginal cost is less than marginal revenue. D. until marginal revenue is zero. 8. If a price-searcher firm can sell 4 units at a price of $6 or it can sell 5 units at a price of $5, the marginal revenue from the fifth unit is A. $1. B. $5. C. $6. D. $25.