Question 1

In 1994 Pentium users around the world learned that their $4.00 pocket calculators could perform some operations more accurately than their $5,000 desktop computers. It took several months before Intel-the maker of the chip-agreed to offer its customers replacement chips. In contrast, Walmart guarantees satisfaction to all customers, with a "no questions asked" return policy on nearly all of the products it sells. Why do you think these firms employ such different consumer relations policies?

Accepted Answer

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Question 2

A monopoly has two production plants with cost functions C₁ = 40 + 0.2Q₁² and C₂ = 50 + 0.1Q₂². The demand it faces is Q = 480 - 5P. What is the profit-maximizing price?

Accepted Answer

First, we need to find the total quantity produced by the two plants by adding their respective quantities: QS1U1B1= QS1U1B11S1U1B0+ QS1U1B12S1U1B0

QS1U1B1= (480-5P)/2

Then, we need to find the monopoly's marginal cost by taking the derivative of the total cost which is the sum of the two plants' cost functions:

MC= dCS1U1B1/dQ= 0.2S1U1B11S1U1B0+0.1S1U1B12S1U1B0

Since the monopoly has market power, it will set its price where marginal cost equals marginal revenue (MR). 
MR= d(Q*P)/dQ= P + Q*dP/dQ= P + Q*(-5/Q)= P-5

Setting MC=MR and substituting QS1U1B1 into the equation:

0.2S1U1B11S1U1B0+0.1S1U1B12S1U1B0= P-5

0.2S1U1B11S1U1B0+0.1[(480-5P)/2 - S1U1B11S1U1B0] = P-5

Solving for the optimal price:

P= $60 per unit

Therefore, the profit-maximizing price is $60 per unit. Choice (D) is the correct answer.

Question 3

A monopoly has two production plants with cost functions C₁ = 40 + 0.2 Q₁² and C₂ = 50 + 0.1 Q₂². The demand it faces is Q = 480 - 5P. What is the profit-maximizing level of output?

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Question 4

Beta Industries manufactures floppy disks that consumers perceive as identical to those produced by numerous other manufacturers. Recently, Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost function is C = 20 + 2Q². a. What are the firm's fixed costs? b. What is the firm's marginal cost? Now suppose other firms in the market sell the product at a price of $10. c. How much should this firm charge for the product? d. What is the optimal level of output to maximize profits? e. How much profit will be earned? f. In the long run, should this firm continue to operate or shut down? Why?

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Question 5

Keds-the traditional maker of white canvas tennis shoes-was near oblivion in the early 1980s because competitors like Nike, Reebok, Adidas, and Brooks took away many of its customers. If you were at the helm of Keds, what would you have done to turn the company around?

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Question 6

What market can you think of, besides that for VCRs, that has shown short-run profits but, over time, has seen profits disappear due to entry?

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Question 7

Would you expect an industry to be monopolistically competitive if consumers did not value variety in the market? Explain.

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Question 8

Pic Industries produces plastic toothpicks that it sells to distributors in the Southwest. During the early 1990s, the price of the plastic it uses to produce toothpicks fell by 46 percent, due to a local glut of recycled plastic containers. Assuming that the market for plastic toothpicks most closely resembles that of perfect competition and that other firms in the industry do not experience similar cost savings in the short run, what impact would this have on the profit-maximizing output, price, and profits of Pic Industries?

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Question 9

You are the manager of a firm that has an exclusive license to produce your product. The inverse market demand curve is P = 900 - 1.5Q. Your cost function is C(Q) = 2Q + Q². Determine the output you should produce, the price you should charge, and your profits.

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Question 10

You are a manager in a perfectly competitive market. The price in your market is $35. Your total cost curve is C(Q) = 10 + 2Q + .5Q². A) What level of output should you produce in the short run? B) What price should you charge in the short run? C) Will you make any profits in the short run? D) What will happen in the long run? E) How would your answer change if your costs were C(Q) = 80 + 5Q + 30Q²?

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Question 11

What is the primary facet of monopolistic competition that does not allow for the presence of long-run profits? If firms are making short-run profits in a monopolistically competitive industry, what will eventually occur that will cause long-run economic profits to be zero?

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Question 12

Manufacturers of laundry detergent and dishwashing soap reinvest a relatively large percentage of their sales revenues on advertising campaigns. Most of these advertisements that appear on television stress the fact that their product is "New and Improved." Why?

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Question 13

Suppose that initially the price is $20 in a perfectly competitive market. Firms are making zero economic profits. Then the market demand shrinks permanently, some firms leave the industry, and the industry returns to a long-run equilibrium. What will be the new equilibrium price, assuming cost conditions in the industry remain constant?

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Question 14

U.S. Airways experienced huge losses for several years in the 1990s, yet it continued to operate its fleets. Why didn't U.S. Airways shut down its operations to avoid the losses?

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The answer of U.S. Airways experienced huge losses for several...

Question 15

Suppose you are a monopolist operating two plants at different locations. Both plants produce the same product; Q₁ is the quantity produced at plant 1, and Q₂ is the quantity produced at plant 2. You face the following inverse demand function: P = 500 - 2Q, where Q = Q₁ + Q₂. The cost functions for the two plants are a. What are your marginal revenue and marginal cost functions? b. To maximize profits, how much should you produce at plant 1? At plant 2? c. What is the price that maximizes profits? d. What are the maximum profits?

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Question 16

Suppose the cost function for your firm is: C = 50 + 4Q + 2Q². a. What is the average fixed cost of producing 5 units of output? b. What is the average variable cost of producing 5 units of output? c. What are the average total cost and marginal cost of producing 5 units of output?

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Question 17

Regardless of the economic environment, every firm will maximize profits by operating at the minimum point of its average total cost curves. Is this statement true or false? Explain.

Accepted Answer

To maximize profits, firms set MR = MC. The only market environment in which this necessarily implies production at the minimum of average costs is in long-run equilibrium under perfect competition. In the short run, even perfectly competitive firms may produce at an output different from minimum average costs.

Question 18

John provides cheese (H) and milk (M) to the market with the following total cost function C(H, M) = 8 + 0.5H² + 0.1M². The prices of cheese and milk in the market are $3 and $4 respectively. Assume that the cheese and milk markets are perfectly competitive. What output of milk maximizes profits?

Accepted Answer

To find the profit-maximizing output of milk, we need to take the partial derivative of the total cost function with respect to milk and set it equal to the market price of milk. The partial derivative of C(H,M) with respect to M is: dC/dM = 0.1² Setting this equal to the market price of milk ($4) and solving for M, we get: 0.1² = 4 Simplifying: ² = 40 Since we know that the price of milk is $4, the revenue from selling milk is: R = $4M We can rewrite the total cost function as: C(H, M) = 8 + (0.5²)H + (0.4²)M To maximize profits, we need to find the level of output (H and M) that minimizes total cost for a given level of revenue (R). We can write the profit function as: π(H, M) = R - C(H, M) π(H, M) = 4M - (8 + (0.5²)H + (0.1²)M) Taking the partial derivative of π(H, M) with respect to M: dπ/dM = 4 - (0.1²) Setting this equal to zero and solving for M: 4 - (0.1²) = 0 Simplifying: ² = 40 This is the same as the equation we found earlier. Therefore, we know that the profit-maximizing level of output for milk is M = 20.

Question 19

Why does the government grant patents to investors? Why does the government give monopoly power to utility companies?

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Question 20

Suppose you are the manager of Alpha Enterprises, a firm that holds a patent that makes it the exclusive manufacturer of bubble memory chips. Based on the estimates provided by a consultant, you know that the relevant demand and cost functions for bubble memory chips are Q = 25 - 0.5P; C = 50 + 2Q.
a. What is the firm's inverse demand function?
b. What is the firm's marginal revenue when producing four units of output?
c. What are the levels of output and price when you are maximizing profits?
d. What will be the level of your profits?

Accepted Answer

The answer of Suppose you are the manager of Alpha...

Quiz 8: Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

A monopoly has two production plants with cost functions C1 = 40 + 0.2Q12 and C2 = 50 + 0.1Q22. The demand it faces is Q = 480 - 5P. What is the profit-maximizing price?

A monopoly has two production plants with cost functions C1 = 40 + 0.2 Q12 and C2 = 50 + 0.1 Q22. The demand it faces is Q = 480 - 5P. What is the profit-maximizing level of output?