Economics 101
Summer 2013
Answers to Homework #4
Due Thursday, June 13, 2013
Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly). Make sure you write your name as it appears on your ID so that you can receive the correct grade. Late homework will not be accepted so make plans ahead of time. Please show your work. Good luck!
Please realize that you are essentially creating “your brand” when you submit this homework. Do you want your homework to convey that you are competent, careful, professional? Or, do you want to convey the image that you are careless, sloppy, and less than professional. For the rest of your life you will be creating your brand: please think about what you are saying about yourself when you do any work for someone else!
1. Use the graph below of a perfectly competitive firm’s cost functions to answer this set of questions.
a. In the short run, what is the fixed cost for this firm? Explain your answer fully.
b. Suppose this firm produces 15 units of output. What is the variable cost of producing this level of output? What is the firm’s AVC of production when it produces 15 units of output. Explain your answer fully.
c. Suppose the market price of the good in the short-run is $9 per unit. What do you know about this firm’s short-run profits, TR, TC, FC, VC, and level of production given this information? What do you predict will happen in the long-run in this market? (Hint: describe verbally, with numerical reference points, what you know about these different measures.)
Answer:
a. We know ATC = AVC + AFC. From the graph we can see that when Q is equal to 10 units, ATC = $9 per unit and AVC = $2 per unit. Thus, AFC = ATC – AVC = $9 per unit - $2 per unit = $7 per unit. To find FC recall that AFC = FC/Q. Rearranging this we get FC = AFC*Q or ($7 Per unit)(10 Units) = $70.
b. We know that the ATC of producing 15 units...