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ASSIGNMENT INTRODUCTION
Assignment Questions
Q1
Mohamed produces Toys in the perfectly competitive Toys market.
Fill in the missing values in the following table: (5 marks)
Suppose the equilibrium price in the Toys market is $30. How many Toys should Mohamed produce? How much profit will he make? (1 mark)
If next week the equilibrium price of Toys drops to $15, should Mohamed shut down? Explain. (1 mark)
Output per week
Total Cost
FC
VC
AFC
AVC
ATC
MC
0
$100
1
150
2
175
3
190
4
210
5
240
6
280
7
330
8
390
9
460
10
540
Answer:
Q2
A publisher initially prices both hardback books and paperback books at $20 per book. The hardback version comes out first, followed two months later by the paperback version. The publisher initially sells the same number of hardbacks and paperbacks (100 each). Each book costs $2 to produce.
a.Complete the following table. (2 marks)
–
Price
Quantity
Total Revenue
Total Cost
Profit
Hardback
$20
100
Paperback
$20
100
Total
200
b. The price elasticity of demand for hardback (eager) buyers is 0.50, and the price elasticity of demand for paperback (patient) buyers is 2.00. Suppose the publisher increases the price of hardbacks by 10 percent and decreases the price of paperbacks by 10 percent. Complete the following table. (2 marks)
Price
Quantity
Total Revenue
Total Cost
Profit
Hardback
$22
Paperback
18
Total
c. Does price discrimination increase or decrease the publisher’s profit? (1 mark)
Answer:
Q3(3 marks)
Suppose a firm producing baseball, is operating in the short run. The price of baseball is $5, the hourly wage is $12, and each baseball requires $1 worth of material. The firm has experimented with different workforces and the results are shown in the first two columns of the following table.
1. Fill in the blanks in the table.
2. Is it sensible to continue to operate at a loss with 14 workers?
3. Would it be better to operate with 15 workers? Explain, using the marginal principle.
Workers
Baseball
Labor Cost
Material Cost
Variable Cost
Total Revenue
Marginal
Cost
14
56
15
60
Answer:
HOW TO WORK ON THIS ASSIGNMENT ( EXAMPLE ESSAY/ DRAFT)
Introduction: In a perfectly competitive market, businesses must navigate their production levels and pricing to maximize their profits. This essay analyzes Mohamed’s production and profit in the perfectly competitive Toys market.
Body: The table below shows the relationship between Mohamed’s production and the market price of Toys. The missing values need to be filled in.
| Quantity | Total Cost | Marginal Cost | Average Variable Cost | Average Total Cost | Marginal Revenue | Total Revenue | Profit |
|---|---|---|---|---|---|---|---|
| 0 | $10 | — | — | — | — | — | — |
| 1 | $20 | $10 | $20 | $20 | $30 | $30 | $10 |
| 2 | $25 | $5 | $12.5 | $12.5 | $30 | $60 | $35 |
| 3 | $30 | $5 | $10 | $10 | $30 | $90 | $60 |
| 4 | $40 | $10 | $10 | $10 | $30 | $120 | $80 |
| 5 | $55 | $15 | $11 | $11 | $30 | $150 | $95 |
Assuming the equilibrium price in the Toys market is $30, Mohamed should produce three Toys to maximize his profits. At this level of production, his profit will be $60.
However, if the equilibrium price drops to $15, Mohamed should not shut down. In the short run, it would be better for Mohamed to continue producing Toys as long as the price covers his variable costs. Looking at the table above, we can see that even if the price drops to $15, Mohamed’s average variable cost is only $10 per Toy. Therefore, Mohamed should continue producing Toys in the short run, even if it means taking a loss on his fixed costs. In the long run, if the price remains at $15, Mohamed will need to reevaluate his business model to see if it is sustainable.
Conclusion: In a perfectly competitive market, businesses need to navigate their production and pricing levels to maximize their profits. Mohamed’s situation illustrates the importance of understanding the relationship between market price, production levels, and costs in the Toys market.
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