Problem 1

 

 

 

Joe Brown’s dairy operates in a perfectly competitive marketplace. Joe’s machinery costs $500 per day and is the only fixed input. His variable costs are comprised of the wages paid to the few workers he employs at the dairy and the grain he feeds to his dairy cows.

 

 

 

The variable cost associated with each level of output is given in the accompanying table.

 

 

 

 

 

 

a. Calculate the total cost, the marginal cost per unit, the average variable cost, and the average total cost, for each quantity of output.

 

 

 

 

 

 

 

 

b. What is the break-even price?

 

 

 

c. What is the shut-down price?

 

 

 

d. Suppose that the price at which Joe can sell milk is $1.50 per gallon. In the short run, will Joe earn a profit?

 

 

 

e. In the short run, should he produce or shut down?

 

 

 

f. Now suppose that the price at which Joe can milk is $1.00 per gallon. In the short run, will Joe earn a profit?

 

 

 

g. In the short run, should he produce or shut down?

 

 

 

h. Finally, Suppose that the price at which Joe can sell milk is $0.75 per gallon. In the short run, will Joe earn a profit?

 

 

 

i. In the short run, should he produce or shut down?

 

 

 

 

 

 

 

Problem 2

 

 

 

Suppose that Media Cable is a single-price monopolist in the market for cable in Anywhere, Iowa. Media has five potential customers: Morgan, Larry, Clyda, Janet, and Tom.

 

 

 

Each of these customers are willing to purchase cable service, but only if the price is just equal to, or lower than, his or her willingness to pay. Morgan’s willingness to pay is $130; Larry’s, $100; Clyda’s, $80; Janet’s, $40; and Tom’s, $0.

 

 

 

Media Cable’s marginal cost per cable package is $40. The demand schedule for cable service packages is shown in the accompanying table.

 

 

 

 

 

 

1. Calculate Media Cable’s total revenue and its marginal revenue

 

 

 

 

 

 

 

 

1. Explain why a monopolist, such as Media Cable, faces a downward-sloping demand curve

 

 

 

c. Explain why the marginal revenue from an additional sale is less than the price of the service

 

 

 

d. Suppose Media Cable currently charges $80 for its service.  If it lowered the price to $40, how large is the price effect?

 

 

 

e. How large is the quantity effect?

 

 

 

f. What is the profit maximizing quantity and price for Media Cable?

 

 

 

 

 

 

 

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References:

 

 

 

 

 

Microeconomics: Unit 7 Assignment: Perfect Competition and Monopoly
Content (15 points)	Points Possible	Points Earned
Problem 1: Perfect Competition Joe Brown’s Diary For each quantity of output: (a) ·         Correctly calculated total costs. ·         Correctly calculated marginal cost per unit. ·         Correctly calculated average variable cost. ·         Correctly calculated average total cost.	2
·         Correctly calculated the break-even price. (b) ·         Correctly calculated the shutdown price. (c)	1
·         Discussed if a profit can be earned at $1.50 per gallon. (d) ·         Discussed if Joe should produce or shut down if the price per gallon is $1.50. (e)	2
·         Discussed if a profit can be earned at $1.00 per gallon. (f) ·         Discussed if Joe should produce or shut down if the price per gallon is $1.00. (g)	2
·         Discussed if a profit can be earned at $0.75 per gallon. (h) ·         Discussed if Joe should produce or shut down if the price per gallon is $0.75. (i)	2
Problem 2: Monopoly Media Cable Company §  Correctly calculated the total revenue and the marginal revenue. (a) §  Explained downward slopping monopolist demand curve. (b) §  Explained why the marginal revenue from an additional sell is less than the price of the service. (c) §  Correctly calculated the price effect. (d) §  Correctly calculated the quantity effect.    (e) §  Correctly calculated profit maximizing quantity and price. (f)	6
Analysis (6 points)
Work demonstrates synthesis of concepts, research, and experience.	2
Work demonstrates the student’s ability to tie relevant information to real-life applications.	2
Analysis exceeds basic comprehension to demonstrate higher-order thinking.	2
Writing (4 points)
Correct use of APA 6th edition format, all sources used to support the paper are referenced	2
Sentences are clear, concise, and direct; tone is appropriate, spelling, grammar, and punctuation are correct.	2
Total	25

 

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