ECN 601 Topic 3 Problems; Chapters 7, 8, 9

Problems: Chapters 7, 8, and 9 1. Individual Problems 7-3 The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $15,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $5,000). Note: Assume Q denotes the quantity produced of a particular design. Which of the following best represents the average cost function for producing any single design? Based on this information, production in any one single design exhibits ____ economies of scale. 2. Individual Problems 7-4 Under increasing returns to scale, average cost _____ as the quantity produced increases. Over this range of output, the marginal cost curve is ______ the average cost curve. 2. Individual Problems 7-4 Under decreasing returns to scale, average cost ____ as the quantity produced increases. Over this range of output, the marginal cost curve is _____ the average cost curve. 3. Individual Problems 7-5 Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your marginal cost decreases by $8. There are no fixed costs, and the first unit costs you $70 to produce. Use the given information to fill in the marginal cost of each unit, as well as the total cost and average cost of each level of output. Suppose you receive a request for proposal (RFP) on a project for two units. Your break-even price for two units is ____ Suppose that if you get the contract, you estimate that you can win another project for two more units. The break-even price for those next two units alone is ____ 4. Individual Problems 8-1 The widget market is competitive and includes no transaction costs. Five suppliers are willing to sell one widget at the following prices: 522, $12, $8, $4, and $2 (one seller at each price). Five buyers are willing to buy one widget at the following prices: $8, $12, 522, $30, and $38 (one buyer at each price). For each price shown in the following table, use the given information to enter the quantity demanded and quantity supplied. In this market, the equilibrium price will be ____ per widget, and the equilibrium quantity will be 4 V widgets. 5. Individual Problems 8-3 Suppose that due to the outbreak of a new flu, known as F114N9, the demand for hand sanitizer has tripled. Smith & Smith, a company that produces and sells hand sanitizer, should _____ production of its hand sanitizer. Suppose there is no vaccine for H14N9, and that a vaccine will not be developed for several decades. True or False: Smith & Smith should increase its productive capacity by leasing new plant and equipment. 6. Individual Problems 8-5 Indicate whether the following change would cause a shift in the demand curve for product A and, if so, the direction of the shift. 7. Individual Problems 8-6 Suppose that on Christmas, the demand for both Christmas trees and Christmas cards increases by the same percentage amount. However, the price of Christmas trees increases by more than the price of Christmas cards. Based on this information, you can conclude that the supply of trees is ____ sensitive to price than the supply of Christmas cards. 8. Individual Problems 9-2 Distributors of snack foods earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and snack foods are complements and that the legalization of marijuana would lead to a decrease in the price of marijuana. Given the relationship between marijuana and snack foods, the legalization of marijuana would lead to _____ in demand for snack foods. Thus, distributors of snack foods would likely _____ the legalization of marijuana. 9. Individual Problems 9-4 Relative to managers in more _____ industries, managers in more _____ industries are more likely to spend their time on pricing strategies rather than on reducing costs. 10. Individual Problems 9-5 Describe the difference in economic profit between a competitive firm and a monopolist in both the short and long run. Which should take longer to reach the long-run equilibrium? In the short run, both monopolists and competitive firms _____ earn positive economic profits. In the long run, ______ can earn a positive economic profit. True or False: The adjustment to long-run equilibrium takes the same amount of time for monopolies and competitive industries.