Module 3 - Which types of firms would normally maximize profits

Module 3 Problem Sets

Name:

Which types of firms would normally maximize profits along with real-life examples?

real-life examples?

Should a firm shut down if its weekly revenue is $2,000, its variable cost is $1,000,
cost is $1,600, of which $1,200 is avoidable if it shuts down? Why?

le cost is $1,000, and its fixed
?

A producer of ballpoint pens has been purchasing ink from an ink supplier and is considering a
supplier. Would the pen company be more or less likely to vertically integrate by buying the in
government taxes ink? Please explain.

and is considering acquiring the ink
ate by buying the ink manufacturer if the

A firm's revenue function is R(q) = 90q - 2q^2. Its cost function is C(q) = 104 +6q +1.5q^2.

a. Using Excel, calculate the levels of revenue, total cost for the firm for q= 0, 1, 2, 3…24. Deter
and the maximum profit for the firm.

b. Using Excel's Charting tool, draw the graph of the profit curve and determine the profit-max
Quantity
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

TR

TC

Profits

c. The firm's marginal revenue function is MR = 90-4q and the marginal cost function is MC = 6
MC for q= 0, 1, 2, 3….24. Verify that the "MR=MC" Rule determines the same profit-maximizing
Quantity

MR

MC

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

104 +6q +1.5q^2.

q= 0, 1, 2, 3…24. Determine the profit-maximizing output

termine the profit-maximizing level of output.

cost function is MC = 6 +3q. Using Excel, calculate MR and
same profit-maximizing output as you found in part (a).

A large city has nearly 500 restaurants, with new ones entering regularly as the population gro
decides to limit the number of restaurant licenses to 500. Which characteristics of this market
with perfect competition and which are not? Is this restaurant market likely to be near perfect
competitive? Why? Are national restaurant franchised chains, perfectly competitive market str
Restaurants with dress codes, are they considered to be perfectly competitive market structure

s the population grows. The city
stics of this market are consistent
y to be near perfectly
mpetitive market structures?
tive market structures as well?

BMW of Colorado advertises on the radio that it has been owned and operated by the same fa
the same location for over 30 years. It then makes two claims: first, that is has lower overhead
nearby auto dealers because it has owned the land for the past 30 years, and second, it charge
price for its cars because of its lower overhead. Discuss the logic of these claims.

ated by the same family and in
has lower overhead than other
nd second, it charges a lower
aims.

The "Upward-Sloping Long-Run Supply Curve for Cotton" Mini-Case shows a supply curve for co
the equilibrium if the world demand curve crosses this supply curve in either (a) a flat section
or (b) the following vertical section. What do cotton farmers in the United States do?

a supply curve for cotton. Discuss
er (a) a flat section labeled Brazil
States do?

In a competitive market, the market demand curve is Q = 28-2p and the market supply curve is
spreadsheet to answer the following questions.

a. Determine the quantity demanded and quantity supplied for p = $4, 5, 6…, 14. Determine th
Quantity
Demanded

Quantity
Supplied

Price
4
5
6
7
8
9
10
11
12
13
14

b. For prices p = $4, 5, 6, …., 14, determine the consumer surplus. How does an increase in pric

c. For prices p = $4, 5, 6, …., 14, determine the producer surplus. How does an increase in price

d. Suppose the government limits the quantity traded in the market to 6 units. Calculate the re

market supply curve is Qs = -8 + 2p. Use a
6…, 14. Determine the equilibrium quantity and price.

oes an increase in price affect the consumer surplus.

es an increase in price affect the producer surplus.

units. Calculate the resulting deadweight loss.