Chapter 8

 

1.      Beta Industries manufactures floppy discs that consumers perceive as identical to those produced by numerous other manufacturers. Recently Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost function is

 

C = 20 + 2Q2

     

      a.   What are the firm’s fixed costs?

            b.   What is the firm’s marginal cost?

           

      Now suppose other firms in the market sell the product at a price of $10.

 

c. How much should this firm charge for the product?

  1. What is the optimal level of output to maximize profits?
  2. How much profit will be earned?
  3. In the long run, should this firm continue to operate or shut down? Why?

 

 

2. Suppose you are the manager of Alpha Enterprises – a firm that holds a patent that makes it the exclusive manufacturer of bubble memory chips. Based on estimates provided by a consultant, you know that the relevant demand and cost functions for bubble memory chips are

Q = 25 - 0.5P;

C = 50 + 2Q.

       a.  What is the firm’s inverse demand function?

b.      What is the firm’s marginal revenue when producing 4 units of output?

c.       What are the levels of output and price when you are maximizing profits?

d.      What will be the level of your profits?

 

3. Why does the government grant patents to investors? Why does the government give monopoly power to utility companies?  

 

4.       “Regardless of the economic environment, every firm will maximize profits by

          operating at the minimum point of its average total cost curve.”

Is this statement true or false? Explain.

 

5. You are the manager in a perfectly competitive market. The price in your market is

           $35. Your total cost curve is C (Q) = 10+ 2Q + 0.5Q2.                

a.       What level of output should you produce in the short run?

b.      What price should you charge in the short run?

c.       Will you make any profits in the short run?

d.      What will happen in the long run?

 

 

6.   You are the manager of a firm that has an exclusive license to produce your product.

         The inverse market demand curve is

P = 900 – 1.5Q.

       Your cost function is

C (Q) = 2Q + Q2.

        Determine how much output you should produce, the price you should charge, and your

        profits.

 

 

7.   You are a monopolist with the following cost and demand conditions :

P = 100 – 2Q and C (Q) = 50 + Q2

a. Determine the profit maximizing output and price.

b. Graph this solution.

        c. Show your profits and the dead weight loss to society in your graph.