ECON 625 Managerial Economics Problem Set 4

1)         Based on your knowledge of the definition of the various measures of short-run cost, complete this table.

Q

TC

TFC

TVC

AC

AFC

AVC

MC

0

120

[A]

[B]

-

-

-

-

1

[C]

[D]

[E]

265

[F]

[G]

[H]

2)         Consider the following cost equation: Total Cost (TC) = 160Q -10Q² + 1.2Q³.  What is Total Cost when the Quantity is 20?

3)         Which of the following represents the equation for the Average Cost (AC)?

AC = 160 – 10Q + 1.2Q²

AC = 160Q – 10Q + 1.2Q

AC = 80Q – 5Q² + 0.6Q³

AC = 53.3Q – 3.3Q² + 0.4Q³

4)         What is the Marginal Cost of producing the 21^st unit? (Hint: Begin by calculating TC at 20 and at 21.) Round your answer to the nearest whole number.

5)         Questions 5 through 7 refer to the following graphical representation of a short-run situation faced by a perfectly competitive firm.

Is this a good market for this firm to be in?

Yes the firm should be here in the short run but in the long run it should leave.

Yes the firm should be here in the short run and it should also stay in the long run.

No; the firm should exit immediately.

6)         Refer to question 5. Which of the following describes the firm’s situation in the short run?

The firm is breaking even

There is a short run loss

There is a short run profit

The short run profit/loss situation cannot be determined from this graph

7)         Refer to question 5. What do you expect to happen in the long run?

New firms will enter; short-run profits will disappear

New firms will enter; short-run losses will disappear

Some existing firms will leave; short-run profits will disappear

Some existing firms will leave; short-run losses will disappear

8)         Questions 8 through 12 refer to the following scenario: The Automotive Supply Company has a small plant that produces speedometers exclusively. Its annual fixed costs are $30,000, and its variable costs are $10/unit. It can sell a speedometer for $25.How many speedometers must the company sell to break even?

9)         Refer to Question 8. What is the break-even revenue?

10)      Refer to Question 8. The company sold 3,000 units last year. What was its profit?

11)      Refer to Question 8. Next year’s fixed costs are expected to rise to $37,500. What will be the break-even quantity?

12)      If the company will sell the number of units obtained in the previous question (number 11) and wants to maintain the same profit as last year, what will its new price need to be? Round your answer to the nearest whole number.