MANAGERIAL ECONOMICS

ASSIGNMENT # 4
CHAPTER 11

PREPARED BY

SAAD KARIMI (4123541)

DATED: 18TH FEB 2016

CHAPTER # 11
TECHNICAL PROBLEMS:
QUESTION NO 10: Suppose that the manager of a firm operating in a competitive market has estimated the firms average variable
cost function to be
AVC = 10 - 0.03Q + 0.00005Q
Total fixed cost is $600.
a) What is the corresponding marginal cost function?
b) At what output is AVC at its minimum?
c) What is the minimum value for AVC? If the forecasted price of the firms output is $10 per unit:
d) How much output will the firm produce in the short run?
e) How much profit (loss) will the firm earn? If the forecasted price is $7 per unit:
f) How much output will the firm produce in the short run?
g) How much profit (loss) will the firm earn? If the forecasted price is $5 per unit:
h) How much output will the firm produce in the short run?
i) How much profit (loss) will the firm earn?
ANSWERS:
a) As demonstrated in Chapter 10, the marginal cost function associated with this average variable cost function is
SMC = a + 2bQ + 3cQ
So;
SMC = 10 2(0.03Q) + 3(0.00005Q)
SMC = 10 0.06Q + 0.00015Q
b) Qm = b/2c = (0.03)/(2)(0.00005) = 30 units
c) 10 - 0.03Q + 0.00005Q = 10 - 0.03(30) + 0.00005(30) = $9.55

b
(4
ac)/(2
a)
d) Q1 , Q2 =
b
P = MC = 10 0.06Q + 0.00015Q
Arrange equation;
P = MC = 0.00015Q 0.06Q + 10

0.06
(40.0001510)/(20.00015)
Q1 , Q2 =
= 659 units,259 units.
0.06
AVC(259) = 10 - 0.03(259) + 0.00005(259) = $5.58 {AVC < Price, Produce)
AVC(659) = 10 - 0.03(659) + 0.00005(659) = $11.94 {AVC > Price, not produce}
259 units
e)

f)
g)

= TR + TC

= (P*Q) + (FIXED+VARIABLE)
=(7*259) + (600+5.58*259)$3,340.22
=$3858.22
259 units

= TR + TC

= (P*Q) + (FIXED+VARIABLE)
=(5*259) + (600+5.58*259)
=$3340.22
h) With a price of $5 firm cannot produce any quanity, because AVC is greater than than price.

i)

$600 (fixeed cost) as loss.

APPLIED PROBLEMS:
QUESTION NO 8: Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling
industry is an increasing-cost industry. In the long run, what do you expect will happen to;
a. Your firms costs of production? Explain.
b. The price you can charge for your remodeling services? Why?
c. Profits in home remodeling? Why?
ANSWERS:
a) Production costs will rise because the entry of new firms encouraged by economic profits will bid up input prices for all the firms in
the remodeling industry.
b) Price will fall because profit will encourage entry, supply will shift rightward, and equilibrium price will fall.
c) Economic profits might fall to zero in the long run.