1) The Los Angeles retail market for unleaded gasoline is fiercely price competitive. Consider the situation faced by a typical gasoline retailer when the local market price for unleaded gasoline is $2.50 per gallon and total cost (TC) and marginal cost (MC) relations are:
TC = $156,250 + $2.25Q + $0.0000001Q2
MC = TC/Q = $2.25 + $0.0000002Q
and Q is gallons of gasoline. Total costs include a normal profit.
A. Using the firm’s marginal cost curve, calculate the profit-maximizing long-run supply from a typical retailer
B. Calculate the average total cost curve for a typical gasoline retailer, and verify that average total costs are less than price at the optimal activity level.
2) Megan’s Salon is a popularly-priced hair cutter on the south side of Chicago. Given the large number of competitors, the fact that barbers routinely tailor services to meet customer needs, and the lack of entry barriers, it is reasonable to assume that the market is perfectly competitive and that the average $15 price equals marginal revenue, P = MR = $15. Furthermore, assume that the salon’s monthly operating expenses are typical of the 50 salons in the local market and can be expressed by the following total and marginal cost functions:
TC = $7,812.50 + $2.5Q + $0.005Q2
MC = TC/Q = $2.5 + $0.01Q
where TC is total cost per month including capital costs, MC is marginal cost, and Q is the number of hair cuts provided. Total costs include a normal profit.
A. Calculate Megan’s profit-maximizing output level.
B. Calculate the Megan’s economic profits at this activity level. Is this activity level sustainable in the long run?
3) Competitive Market Surplus. Suppose demand and supply conditions in the competitive market for unskilled labor are as follows:
P = $15 0.3QD (Demand)
P = $3 + $0.1QS (Supply)
where Q is millions of hours of unskilled labor and P is the wage rate per hour.
A. Illustrate the industry equilibrium wage/employment combination both graphically and algebraically.
B. Calculate the level of excess supply (unemployment) if the Federal minimum wage is raised from $5.15 to $7 per hour.
4) Regulation Costs. Kingston Components, Inc., produces electronic components for cable TV systems. Given vigorous import competition, prices are stable at $4,500 per unit in this dynamic and very competitive market. Kingston’s annual total cost (TC) and marginal cost (MC) relations are:
TC = $7,000,000 + $500Q + $0.5Q2
MC = TC/Q = $500 + $1Q
where Q is output.
Suppose the Occupational Health and Safety Administration (OSHA) has recently ruled that the company must install expensive new shielding equipment to guard against worker injuries. This will increase the marginal cost of manufacturing by $100 per unit. Kingston’s fixed expenses, which include a required return on investment, will be unaffected.
A. Calculate Kingston’s profit-maximizing price/output combination and economic profits before installation of the OSHA-mandated shielding equipment.
B. Calculate the profit-maximizing price/output combination and economic profits after Kingston has met OSHA guidelines.
C. Compare your answers to parts A and B. Who pays the economic burden of meeting OSHA guidelines?
5) Price/Output Determination. Columbia Cars Inc., a rapidly expanding new entrant to this metropolitan area, is considering two proposals for the provision of its cosmetic detailing of cars (washing, waxing, polishing, engine cleaning, etc.). First, a large janitorial agency with some experience in the detailing of cars has offered to purchase the business detailing equipment in return for an exclusive franchise. A second proposal would allow several small contractors to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individuals would bid for the right to provide service on groups of cars as they were delivered to the lot, presumably based on how busy they were at the time. The car lot would then allocate business to the lowest bidder.
CC Inc. has conducted a study of its past sales records and the amount of detailing spent on each car, and the premium over book value recouped in the sale to estimate the amount they would be willing to pay for various amounts of detailing. The car lot has also estimated the total cost of service per car. Service costs are expected to be the same whether or not an exclusive franchise is granted. To instigate bidding, CC Inc. guarantees the winner of any bid a minimum per car, whether or not the service is used.
A. Use the indicated price and cost data to complete the following table.
Hours of Detailing per Car Price per Hour Total Revenue Marginal Revenue Total Cost Marginal Cost
0 $24.00 $ 0.00
1 23.40 18.00
2 22.80 36.00
3 22.20 54.00
4 21.60 72.00
5 21.00 90.00
6 20.40 108.00
7 19.80 126.00
8 19.20 144.00
9 18.60 162.00
10 18.00 180.00
B. Determine price and the level of service if competitive bidding results in a perfectly competitive price/output combination.
C. Determine price and the level of service if the car lot grants a monopoly franchise.
6. Jersey Imports, Inc., markets electronic devices imported from Thai producers. The company recently introduced an innovative and enormously successful 5 GB Joystick (computer memory device), but a flood of competitor entry and downward pressure on both prices and profits is expected during the coming year.
A. Use Jersey Imports’ price, output and total cost data to complete the following table:
Price per unit Output (000) Total Revenue ($000) Marginal Revenue ($000) Total Cost ($000) Marginal Cost ($000) Average Cost ($)
$50 0 $ 600
48 100 5,000
46 200 9,200
44 300 13,200
42 400 16,700
40 500 20,100
38 600 22,800
36 700 25,200
B. Assuming cost conditions remain constant, what is the monopolistically competitive high-price/low-output long-run equilibrium?
C. What is the monopolistically competitive low-price/high-output equilibrium?
(Note: This is also the perfectly competitive equilibrium.)
7. An illegal cartel has been formed by three leading suppliers in the local market. Total costs at various levels of service per day are as follows:
Total Cost ($000)
Daily Output
(000 units.) Firm A,
Inc. Firm B, P
Inc. Firm C,
Inc.
0 $ 2 $ 3 $ 0
1 12 14 8
2 21 23 17
3 29 30 27
4 36 41 38
5 47 53 50
A. Construct a table showing the marginal cost of production per firm.
B. From the data in part A, determine an optimal allocation of output and maximum profits if the cartel sets Q = 10(000) and P = $10.
C. Is there an incentive for individual members to cheat by expanding output when the cartel sets Q = 10(000) and P = $9?
TAKE ADVANTAGE OF OUR PROMOTIONAL DISCOUNT DISPLAYED ON THE WEBSITE AND GET A DISCOUNT FOR YOUR PAPER NOW!