ECON380 Purdue University Ch 5 Monopolist with Total Cost Function Questions Please follow the instruction and complete all 12 question from assignment bel

ECON380 Purdue University Ch 5 Monopolist with Total Cost Function Questions Please follow the instruction and complete all 12 question from assignment below. Feel free to work on paper and submit as picture, but make sure all writing are read able and picture are clear. Thanks ECON 380: Managerial Economics
Summer 2019
Midterm Study Guide
This study guide will help you to prepare for our midterm exam. You can hand in your solutions for this
study guide at the beginning of the exam, and you will receive extra credit on the exam for your efforts (up
to five percentage points). To get full extra credit you only need to choose 10 of these questions, but you
can hand in as much as you like. Please do so! It helps your exam score while helping you prepare for the
exam itself.
The exam will have two parts: multiple choice and short answer. The short answer will be a mix of
analytical/technical questions and conceptual questions. The multiple choice will reflect key concepts and
ideas that we have discussed in class. In addition to this review guide, your first four homeworks, the
lecture notes, and the posted solutions to lecture examples are excellent study materials.
Please bring a simple calculator (no graphing or financial calculators and no phones…) and your writing
utensils to the exam. Scantrons are not needed.
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1. Given a cost function ??(??) = ?????? + ?????? + ???? + ???? , find an expression for the marginal cost.
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Perfect Competition
2. A firm operates in a perfectly competitive industry. Suppose it has a short run total cost function
given by ??(??) = ????, ?????? + ??. ???????? . If the market price is $56, find the firm’s profit-maximizing
level of production and calculate their profits.
3. The Green Company produces chemicals in a perfectly competitive market. The current market
price is $40; the firm’s total cost is C=100+4Q+Q2.
a) Determine the firm’s profit-maximizing output. More generally, write down the equation for the
firm’s supply curve in terms of price, P.
b) Complying with more stringent environmental regulations increases the firm’s fixed cost from
100 to 400. Would this affect the firm’s output in the short run? What about in the long run?
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4. Consider a perfectly competitive firm with a cost function of ??(??) = ?? + ( )???? .
a) Solve for the firm’s supply function, i.e. an expression for the firm’s profit-maximizing level of
output at any given market price.
b) Suppose that the market demand curve is given by ???? (??) = 10 ? 2?? . If there are 8 identical
firms in the market (they all have the same cost function!), derive an expression for market
supply and find the equilibrium price.
c) Calculate the firm’s profits. Is the market in long-run equilibrium? Why or why not? If not,
explain any long-run adjustments that you would expect and discuss how they would affect the
firm.
5. Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a
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good at a price of $16 per unit. Its cost function is C=50+ Q2.
a) Determine the firm’s profit-maximizing level of output. Compute its profit.
b) The industry demand curve is Q=200-5P. What is the total market demand at the current $16
price?
c) Is this sustainable in the long run? What will be true in the long run, and, qualitatively, how will
price, quantity supplied per firm, and number of firm’s change in the long run?
Monopoly
6. A drug company has a monopoly on a new class of corticosteroid. The market demand is given by
?? = ?????? ? ??. ????????. The monopolist’s costs are described by ??(??) = ??, ??????, ?????? + ????.
a) Under uniform pricing (the basic monopoly problem), calculate the monopolist’s profitmaximizing price, quantity, and profits.
7. Consider a monopolist with a cost function of ??(??) = ?? + ????. Suppose the market demand
function is ???? = ???? ? ????.
a) Under uniform pricing (i.e. the basic monopoly problem), find the monopolist’s optimal price
and quantity.
b) Calculate the monopolist’s profits. Draw a diagram of the standard monopolist’s problem,
identifying their profit maximizing price and quantity and a graphical illustration of their profits.
The diagram does not have to depict the exact equations I have given, just use generic curves.
8. Consider a monopolist who has a cost function of ??(??) = ??????. This monopolist faces two
consumers, the first having demand ???? (???? ) = ???? ? ???? and the second having demand ???? (???? ) =
???? ? ???? .
a) Calculate the profit-maximizing price and then the optimal quantity sold to each consumer
under uniform pricing, i.e. the monopolist charges the same price for both consumers. What are
the monopolist’s profits?
b) Suppose now that the monopolist can engage in third degree price discrimination. Find the
monopolists profit maximizing prices for consumers 1 and 2 (they should be different), and
calculate the monopolist’s profits. How do they compare to the profits in part (a)?
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9. A monopolist with total cost function ??(??) = ?? + ???? faces a market demand function of
???? (??) = ???? ? ?????? in market A and ???? (??) = ???? ? ???? in market B.
a) Suppose the monopolist engages in 3rd degree price discrimination. Calculate monopolist’s profit
maximizing prices and quantities for each market.
b) Suppose the monopolist must charge a uniform price to each of the consumer types. Calculate
the monopolist’s profit-maximizing price and quantity sold under uniform pricing.
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10. A monopolist has a single production plant in California with a total cost function of ??(??) = ???? ,
where ?? is total output. The good can be sold to two separate markets, those on the west coast
and those on the east coast. There is no resale between coasts. The inverse demand function for
the east coast is given by ?? = ?????? ? ???? and the inverse demand function for the west coast is
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given by ?? = ???? ? ???? .
a) Calculate the monopolist’s profits if he uses standard uniform pricing. How do these compare
with his profits under optimal third degree price discrimination that you solved in part (a)?
b) The monopolist can build a second plant in Massachusetts (i.e. an east coast plant) that is
identical to the California plant (i.e. west coast plant), and plans on producing output for each
region at their respective plant. He will then treat these markets as separate, charging different
prices to each market. If the cost of constructing the plant is $1200 should the monopolist build
the second plant? How much should the monopolist be willing to pay for the plant? Explain.
Microeconomics Review Questions
11. You and your best friend are brilliant entrepreneurs who are considering opening your own
business tutoring struggling college students in economics. This wonderful endeavor takes the
place of the job you were offered working for a rival tutoring service and earning $2,000 a month.
Your best friend was offered a similar job at $1,500 (better not tell him about your offer!).
Operating expenses for your tutoring business will total $5,000 monthly when you include
variable costs such as hiring other tutors. Additionally you will need to lease a building to work
out of for $2,000 per month. Together the two of you have enough to cover these operating
expenses and the lease but if you pull that money out of your bank accounts you will lose out on
$200 in interest income you could have collectively earned. You anticipate revenue from your
tutoring business will be $12,000 per month.
a) What would be the accounting profit/loss per month for your business?
b) What would be the economic profit/loss per month for your business?
c) Should you and your friend open the business? Why or why not?
12. Answer the following questions regarding the market for Tom Brady jerseys (for those of you who
are not sports fans, he’s a football player and pretty much the greatest quarterback of all time…
with the exception of maybe, just maybe, Joe Montana).
a) Explain what we mean by “the market” for Tom Brady jerseys, and depict it graphically.
b) Write out the standard determinants of demand and the determinants of supply.
c) Suppose that more firms enter the market, while at the same time Tome Brady and the Patriots
LOSE in the Super Bowl (I know, I know, it still isn’t making any sense to me either…). Explain
what determinants of supply and/or demand have changed, depict these changes to the market
graphically, and predict how equilibrium price and quantity would change.
d) Suppose that the price for Rob Gronkowski jerseys increases, while at the same time jersey
manufacturers see increased labor costs because they move their factories back to the US (they
want to give them Made in America stamps). Explain what determinants of supply and/or
demand have changed, depict these changes to the market graphically, and predict how
equilibrium price and quantity would change.

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