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Chapter 5--Costs  (Tuesday and Thursday classes: from p. 175)

Chapter 6--Organization of the Firm (Tuesday and Thursday classes)

Chapter 7--Nature of Industry (Tuesday class only)

Chapter 8--PC, MC, and Monopoly (Tuesday and Thursday classes)

Chapter 9--Basic Oligopoly Models (Tuesday class: all.  Thursday class: to p. 330)

Chapter 10--Game Theory (Tuesday class: none.  Thursday class: none)

Chapter 5--Costs
TC, TFC, TVC, MC, ATC, AFC, AVC, Long-run/Short-run costs,
Know how to find AVC, AFC, ATC, MC from an equation for TC.
Economies of scale, Economies of scope, Learning curve

1. Given TC = 400 + 80Q - 0.016Q² + 0.0000032Q³,  Answers
    a.    find the equation for the TVC
    b.    find the equation for the AVC
    c.    find the equation for the AFC
    d.    find the equation for the MC
    e.    find the MC when Q = 3500
    f.    find the Q where the AVC has its lowest value

2.  Economies of scale exist when the firm's _____ curve is downward sloping.   Answer

3.  A firm produces two products: Good 1 and Good 2.  The firm's total cost curve is given by

    If Q₁ = 30 and Q₂ = 50, does this firm have economies of scope?   Answer

4. What are the two ways for economies of scope to occur?   Answer

5.  According to the concept of the learning curve, the firm's ATC falls as a result of ______ .  Answer

Chapter 6

1.  A firm uses an input that is used only in its products.  The input is a device that must be produced carefully because defects will not be apparent until the input has been built into the final product and the product is tested.  How should the firm procure this input?    Answer

2.  A firm uses an input that is highly standardized and for which there is a well functioning market.  The transactions costs of buying the product are low.  How should the firm procure this input?   Answer

3.  What are three types of transactions costs?   Answers

4.  What are three problems that can result from specialized investments?  Answers

5.  What are the advantages and disadvantages of compensating workers by piece rates? by revenue sharing?   Answers
 

Chapter 7 .
1.

Chapter 8 .
The Diagram below shows a perfectly competitive firm.
The market price is $36 per unit.

1.  What quantity would the perfectly competitive firm above choose to produce to maximize its profits?
        35,  50,  80,  90,  95,  or 140    Answer

2.  If the firm chooses to produce 35 units per day, how much profit will the firm make?   Answer

3.  In what ways do economists consider monopolies inefficient?     Answer

4.  Describe the long-run position of a firm in a monopolistically competitive industry.  Answer

5.  There are 50 gasoline stations in a town, each providing identical gasoline at different locations in the town.  Starting a gas station or selling it are fairly easy.  Each gas station is small relative to the size of its total market.  What type of industry best characterizes these 50 firms?
 

ANSWERS BELOW:
 
 
 
 
 
 
 
 

YES, THEY'RE DOWN THERE
 
 
 
 
 
 
 
 
 

YOU FOUND THEM!

Chapter 5

1. Given TC = 400 + 80Q - 0.016Q² + 0.0000032Q³,
    a.    find the equation for the TVC  80Q - 0.016Q² + 0.0000032Q³,
    b.    find the equation for the AVC  80 - 0.016Q + 0.0000032Q² ,
    c.    find the equation for the AFC   400/Q = 400Q^-1
    d.    find the equation for the MC    80 - 0.048Q + 0.0000096Q²
    e.    find the MC when Q = 3500    $29.60
    f.    find the Q where the AVC has its lowest value Q_min = -(-0.016)/(2•0.0000032) = 2500
 
 
 
 
 
 
 
 
 
 
 
 
 

2.  Economies of scale exist when the firm's   ATC or Long-Run AC   curve is downward sloping.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3.  A firm produces two products: Good 1 and Good 2.  The firm's total cost curve is given by

    If Q₁ = 30 and Q₂ = 50, does this firm have economies of scope?  Yes
 

        TC(30,0) = 2500  TC(0,50) = 5000
        TC(30,50) = 3500
        SC = (2500 + 5000 - 3500)/3500 = 1.14.  Since this is positive, we can tell that there are economies of scope.

        Even though the condition f - aQ1Q2 > 0 was derived in the book using a quadratic cost function, it does apply equally well to this linear-with-interaction cost function.  Notice that f - aQ1Q2 =
4000, which is the difference between 7500 and 3500.
 
 
 
 
 
 
 
 
 
 
 
 

4. What are the two ways for economies of scope to occur?
        - If a is negative, meaning that there are cost complementarities

        - If a is positive, but the fixed costs are sufficiently large so that f - aQ1Q2 > 0.
 
 
 
 
 
 
 
 
 
 
 
 

5.  According to the concept of the learning curve, the firm's ATC falls as a result of  Learning from Experience    .  The learning curve shows ATC as a function of the total cumulative output ever produced by the firm.
 
 
 
 
 
 
 
 
 
 

Chapter 6

1.  A firm uses an input that is used only in its products.  The input is a device that must be produced carefully because defects will not be apparent until the input has been built into the final product and the product is tested.  How should the firm procure this input?  In-house production or vertical integration with a firm that already produces it.  Monitoring production would be difficult if it is out-sourced.  So would specifying everything that should be specified in a contract.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2.  A firm uses an input that is highly standardized and for which there is a well functioning market.  The transactions costs of buying the product are low.  How should the firm procure this input?  By spot exchange.
 
 
 
 
 
 
 
 
 
 
 
 

3.  What are three types of transactions costs?
            search costs, negotiation costs (including lawyers and the cost of gathering background information to be prepared for negotiations), costs of specialized equipment needed for the exchange.  See p. 205
 
 
 
 
 
 
 
 

4.  What are three problems that can result from specialized investments?
Costly bargaining, opportunism, and underinvestment.  See pp. 207-209.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5.  What are the advantages and disadvantages of compensating workers by piece rates?
        Advantages:  rewards extra effort and ability, creating an incentive to work harder
        Disadvantage: creates an incentive to reduce quality
 
 
 
 
 
 

    by revenue sharing?
        Advantage: provides an incentive to create more products and salable products.
        Disadvantage: creates an incentive to maximize sales at the expense of profits, ignoring costs.

1.  What quantity would the perfectly competitive firm above choose to produce to maximize its profits?
        P = MC at Q = 95

2.  If the firm chooses to produce 35 units per day, how much profit will the firm make?
        I forgot to label the ATC when Q = 35.  It is higher than the P = $36, so let's call it $41.
        Profit = (36 - 41)35 = -175

3.  In what ways do economists consider monopolies inefficient?
        Allocative inefficiency: P > MC implies that not enough resources are being devoted to producing this product.
        ATC is not minimized, except by chance.  Not even in the long run.
        Economic profits are positive, even in the long run.  The profit maximizing output would only yield zero economic profit by chance.

4.  Describe the long-run position of a firm in a monopolistically competitive industry.
        Because of easy entry and easy exit, the typical firm in a monopolistically competitive industry will make zero economic profit.  Its demand curve will be tangent to its ATC curve.  Since the demand curve has a negative slope (unlike a perfectly competitive firm's demand curve, which is horizontal) the tangency point will be on the downward-sloping portion of the firm's ATC curve.
 
 
 
 
 
 
 
 
 

5.  There are 50 gasoline stations in a town, each providing identical gasoline at different locations in the town.  Starting a gas station or selling it are fairly easy.  Each gas station is small relative to the size of its total market.  What type of industry best characterizes these 50 firms?
  This description satisfies the assumptions of Monopolistic Competition.