Reference no: EM132563498

Assignment - Micro Theory Problems

Problem 1. Denek Box Company produces card boxes in bundles of 1,000 boxes. The market is highly competitive, with boxes currently selling for $100 per thousand. Denek's total and marginal cost curves are:

TC = 3,000,000 + 0.001Q²

MC = 0.002Q

Q is measured in thousand box bundles per year.

a. Calculate Denek's profit maximizing quantity.

b. Is the firm earning a profit/loss?

c. Analyze Denek's position in terms of the shutdown condition.

d. Should Denek operate or shut down in the short-run?

Problem 2. A competitive market is made up of 100 identical firms.

Each firm has a short-run marginal cost function as follows: MC= 5 + 0.5Q where Q represents units of output per unit of time. The firm's average variable cost curve intersects the marginal cost at a vertical distance of 10 above the horizontal axis.

a. Determine the market short-run supply curve.

b. Calculate the price that would make 2,000 units forthcoming per time period.

Problem 3. The demand and supply functions for basic cable TV in the local market are given as: Q_D = 200,000 - 4,000P and Q_S = 20,000 + 2,000P.

a. Calculate the consumer and producer surplus in this market.

b. If the government implements a price ceiling of $15 on the price of basic cable service, calculate the new levels of consumer and producer surplus.

Problem 4. The market demand and supply functions for milk are: Q_D = 58 - 30.4P and Q_S = 16 + 3.2P.

a. If a price floor of $1.75 is implemented, calculate the change in producer surplus.

b. How many surplus units of milk are being produced?

c. If the government purchases all the excess units at $1.75, calculate the milk expenditures by government?

d. Does the increase in producer surplus due to the price floor exceed government spending on excess milk? Explain!

Problem 5. A country which does not tax cigarettes is considering the introduction of a $0.40 per pack tax. The economic advisors to the country estimate the supply and demand curves for cigarettes as: Q_D = 140,000 -25,000P and Q_S = 20,000 + 75,000P

Where Q = daily sales in packs of cigarettes, and P = price per pack.

The country has hired you to provide the following information regarding the cigarette market and the proposed tax.

a. What are the equilibrium values in the current environment with no tax?

b. What price and quantity would prevail after the imposition of the tax? What portion of the tax would be borne by buyers and sellers respectively?

c. Calculate the deadweight loss from the tax.

d. What tax revenue will be generated?

Problem 6. DD Company is a monopolist in the doorstop industry. Its cost is C = 100-5Q+Q², and demand is P=55-2Q.

a. What price should DD set to maximize profit?

b. What output should the firm produce?

c. How much profit does DD gain?

d. What is the consumer and producer surplus?

e. What if the government feels the price is too high. What is the optimal price ceiling should it set?