3. Imagine there is a monopolist with a cost function of C= 500 +5Q + ¹/4Q², and a demand function of P = 50 - ¹/₂Q. a. State the firm's fixed costs. b. Differentiate the cost function to find the marginal cost. C. Multiply the demand function by Q to find the revenue function. d. Differentiate to find the marginal revenue. Use the rule that maximum profit is when MC = MR to find the profit-maximising Q. Now use the demand function to find the market price at this Q. Use your results to find the firm's total revenue at this Q. Use the cost function to find the firm's total cost at this Q. Hence find the firm's profit. e. f. g. h. i. 4. Taking the same firm: a. Find the firm's average cost function, by dividing the cost function by Q. b. Differentiate the average cost function you have found, and set the result equal to zero.

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Chapter1: Making Economics Decisions
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Question
3. Imagine there is a monopolist with a cost function of C = 500 +5Q + ¹/4Q², and a demand
function of P = 50 - ¹/₂Q.
a. State the firm's fixed costs.
b.
Differentiate the cost function to find the marginal cost.
c. Multiply the demand function by Q to find the revenue function.
d. Differentiate to find the marginal revenue.
e.
f.
g.
h.
i.
Use the rule that maximum profit is when MC = MR to find the profit-maximising Q.
Now use the demand function to find the market price at this Q.
Use your results to find the firm's total revenue at this Q.
Use the cost function to find the firm's total cost at this Q.
Hence find the firm's profit.
4. Taking the same firm:
a. Find the firm's average cost function, by dividing the cost function by Q.
b. Differentiate the average cost function you have found, and set the result equal to zero.
C. Then solve for Q to find the level of Q at which average cost is minimised.
d. Use the value for Q that you have just found in the average cost function, to compute the
minimum average cost.
Now use the demand function to find the quantity demanded if the good were sold at that
minimum average cost.
f. Compare the results you found in parts (c) and (e). Comment on what you have found,
thinking about market structure and minimum efficient scale.
e.
5. Again taking the same firm:
a.
Use graph paper to carefully hand-draw the firm's demand curve, MC curve, and MR curve.
Your x-axis should show Q and go from 0 to 50. Your y-axis should show P (and C) and also
go from 0 to 50. You will get credit for a neat diagram.
b. Use dotted lines and shading to show the areas of consumer surplus, producer surplus, and
deadweight loss.
c. Using the geometric rule that the area of a triangle is equal to height x width x ½2, find the
area of deadweight loss. You will get extra marks for using demand, MC and MR to be
precise about the height and width of the triangle. For example, MR = MC will give you the
bottom point of the triangle (as this is where the two lines cross).
Transcribed Image Text:3. Imagine there is a monopolist with a cost function of C = 500 +5Q + ¹/4Q², and a demand function of P = 50 - ¹/₂Q. a. State the firm's fixed costs. b. Differentiate the cost function to find the marginal cost. c. Multiply the demand function by Q to find the revenue function. d. Differentiate to find the marginal revenue. e. f. g. h. i. Use the rule that maximum profit is when MC = MR to find the profit-maximising Q. Now use the demand function to find the market price at this Q. Use your results to find the firm's total revenue at this Q. Use the cost function to find the firm's total cost at this Q. Hence find the firm's profit. 4. Taking the same firm: a. Find the firm's average cost function, by dividing the cost function by Q. b. Differentiate the average cost function you have found, and set the result equal to zero. C. Then solve for Q to find the level of Q at which average cost is minimised. d. Use the value for Q that you have just found in the average cost function, to compute the minimum average cost. Now use the demand function to find the quantity demanded if the good were sold at that minimum average cost. f. Compare the results you found in parts (c) and (e). Comment on what you have found, thinking about market structure and minimum efficient scale. e. 5. Again taking the same firm: a. Use graph paper to carefully hand-draw the firm's demand curve, MC curve, and MR curve. Your x-axis should show Q and go from 0 to 50. Your y-axis should show P (and C) and also go from 0 to 50. You will get credit for a neat diagram. b. Use dotted lines and shading to show the areas of consumer surplus, producer surplus, and deadweight loss. c. Using the geometric rule that the area of a triangle is equal to height x width x ½2, find the area of deadweight loss. You will get extra marks for using demand, MC and MR to be precise about the height and width of the triangle. For example, MR = MC will give you the bottom point of the triangle (as this is where the two lines cross).
Questions
1. Consider the diagram below.
a. Hand-draw the diagram, and show how the feasible frontier changes if there is an
improvement in the technology of food production.
b. If Angela is an independent farmer (so, she owns the land and starts at point C), use the
c.
d.
concepts of income and substitution effects explain how the improvement might cause her
optimal labour supply to either fall or rise.
Show both outcomes, using a different colour for each.
Which outcome (fall or rise) seems more consistent with real-world data concerning labour
hours and technology improvements?
Bushels of grain
12-
4.5
0
0
Angela's reservation
indifference curve, IC,
16
Angela's hours of free time
Angela's best feasible indifference curve
when an independent farmer, IC
Feasible frontier: Angela
and Bruno combined
24
2. Now imagine a different situation, where Angela is a worker on Bruno's land. Bruno has the
bargaining power, so Angela is at point D. You are a benign ruler who wants to improve Angela's
situation. Discuss the pros and cons of each policy below, taking into account economic
efficiency, where Angela would end up, and any other effects you can think of.
a. Improve Angela's reservation option, so that her reservation indifference curve is higher.
Make a new law that workers can work a maximum of 7 hours each day.
b.
C. Create jobs in other industries, so that there is a shortage of workers in farming.
Transcribed Image Text:Questions 1. Consider the diagram below. a. Hand-draw the diagram, and show how the feasible frontier changes if there is an improvement in the technology of food production. b. If Angela is an independent farmer (so, she owns the land and starts at point C), use the c. d. concepts of income and substitution effects explain how the improvement might cause her optimal labour supply to either fall or rise. Show both outcomes, using a different colour for each. Which outcome (fall or rise) seems more consistent with real-world data concerning labour hours and technology improvements? Bushels of grain 12- 4.5 0 0 Angela's reservation indifference curve, IC, 16 Angela's hours of free time Angela's best feasible indifference curve when an independent farmer, IC Feasible frontier: Angela and Bruno combined 24 2. Now imagine a different situation, where Angela is a worker on Bruno's land. Bruno has the bargaining power, so Angela is at point D. You are a benign ruler who wants to improve Angela's situation. Discuss the pros and cons of each policy below, taking into account economic efficiency, where Angela would end up, and any other effects you can think of. a. Improve Angela's reservation option, so that her reservation indifference curve is higher. Make a new law that workers can work a maximum of 7 hours each day. b. C. Create jobs in other industries, so that there is a shortage of workers in farming.
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