Fall 2001
Answer Key for Problem Set #6
1.B
In perfect competition, we have P=MC
2.B
If average cost is minimized at $700, then marginal cost is also $700. Price, then, exceeds the cost of producing a computer, so more should be produced.
3. C
In perfect competition’s equilibrium, MR=P=MC. In monopoly, P>MC=MC
4. B
In perfect competition’s equilibrium, 5=AR=MR=P=MC=Q2- 6Q+14, then (Q-3)2=0, this means Q=3, then profit= TR- TC= PQ- TC=5*3- TC. While TC=(1/3)*27-3*9 +14*3-22 =2. Hence, Profit=15-2 =13.
5. B
Imperfect competitive producers will restrict output and charge higher prices
6 C
In the long run Perfect competitive world, since we know at P=10, firm reach equilibrium, this means 10=P= LMC = Q2 – 12Q + 46, then Q=6. Since we have 100 identical firms, then market quantity is 6*100=600.
7.
(a)Since AC=AVC+AFC, we get x=4.5, y=0.7.
(b)When P=AC, Miaojie gets zero profit. Hence P=4.
(c)Shut down price is 2 since P=AVC.
(d)He continues to produce since P> AVC, this means that he can cove part of the fixed cost.
8.
(a)The last dollar spent on each good should purchase an equal amount of marginal utility.
(b)MUx / Px = MUy/ Py
(c)Produce until the quantity is reached where marginal revenue is inadequate to cover marginal cost.
(d)Marginal cost is the opportunity cost of the resources used to produce the final unit of output----- the value of the other goods that we could have produced instead.
(e)P =MR =MC. This is true for all profit maximizers in perfect competition.
(f)The per dollar cost of the last units of satisfaction from X is relatively too high because 100/80 < 120/60
(g)Spend less on X and reallocate funds to Y
(h)Diminishing marginal utility will drive MUx up and MU y down, whereas decreasing marginal productivity will make MCx decrease and MCy increase until a balance is struck.