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University of British Columbia *

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COMM 295

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Economics

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May 24, 2024

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1

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A competitive firm's bookkeeper, upon reviewing the firm's books, finds that the firm spent twice as much on its plant, a fixed cost, as the firm's manager had previously thought. Should the manager change the output level because of this new information? How does this new information affect profit? A change in fixed costs does not affect the firm's decisions because how much the firm produces and whether it shuts down in the short run depend only on the firm's -variable costs. The change in the bookkeeper's valuation of the historical amount spent on the plant does not affect economic profit because economic profit is only based on -opportunity costs. Q11 The producers of "Spider-Man: Turn Off the Dark" spent $75 million bringing their musical to Broadway (Kevin Flynn and Patrick Healy, "How the Numbers Add Up [Way Up] for 'Spider-Man,'" New York Times , June 23, 2011). They spent $9 million alone on sets, costumes, and shoes. Their operating expenses were $1.2 million a week as of January 2011. Since then, they revamped the show and lowered their operating costs to about $1 million a week. The show is selling out but bringing in between $1.2 and $1.3 million a week. The producers acknowledge that at the show's current earnings level, "Spider-Man" would need to run more than seven years to pay back the investors. Only 18 Broadway shows have ever run for seven years or longer. Should "Spider-Man" shut down or keep operating? Why? "Spider-Man" should -keep operating because its weekly revenue is greater than its weekly variable costs. Q12 A firm claims on its website that it has been in the same location for over 50 years and has lower overhead than other firms because it bought the land 50 years ago when it was inexpensive. It also claims that it charges lower prices than competitors because of its lower overhead. Discuss the logic of these claims. From a short term perspective, the claim that lower overhead (from already owning the land) lowers the firm's prices is -false because land is a fixed cost in the short run. Q13 A firm's profit function is π (q)= R(q)−C(q)=40q− (35+20q+10q^ 2 ). What is the positive output level that maximizes the firm's profit (or minimizes its loss)? What is the firm's revenue, variable cost, and profit? Should it operate or shut down in the short run? To find the profit-maximizing output level, take the derivative of the profit function with respect to q, set the derivative equal to zero, and then solve for q.
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