1. Suppose that a monopolistically competitive firm must build a production faci
ID: 1099783 • Letter: 1
Question
1. Suppose that a monopolistically competitive firm must build a production facility in order to produce a product. The fixed cost of this facility is FC = $24. Also, the firm has constant marginal cost, MC = $3. Demand for the product that the firm produces is given by P = 27-3Q.
a) Fill in the table below. If any of your values have decimals, you may round to only one numeral after the decimal (nearest 10th of a dollar).
Quantity of Output
Price
Total Cost
Average Total Cost
Total Revenue
Profits
1
2
3
4
5
6
7
8
9
b) How much output will this firm produce if it maximizes profit?
c) What price should this firm charge if it wants to maximize profit?
2. Carefully explain what will happen as we move from the short run to a long run equilibrium in a monopolistically competitive industry if firms are making a positive profit in the short run. Your explanation should clearly state what will happen to the demand curve facing an individual firm and the reason why this happens.
3. Suppose that two players are playing the following game. Player A can choose either Top or Bottom, and Player B can choose either Left or Right. The payoffs are given in the following table, where the number on the left is the payoff to Player A, and the number on the right is the payoff to Player B:
Player B
Player A
Left
Right
Top
2 5
1 4
Bottom
0 1
3 8
A) Does player A have a dominant strategy, and if so what is it?
B) (4 points) Does player B have a dominant strategy and if so what is it?
C) For each of the following say True if the strategy combination is a Nash equilibrium, and False if it is not a Nash equilibrium:
i) Player A plays Top and Player B plays Left
ii) Player A plays Bottom and Player B plays Left
iii) Player A plays Top and Player B plays Right
iv) Player A plays Bottom and Player B plays Right
D) If each player plays her maximin strategy what will be the outcome of the game? (Give your answer in terms of the strategies each player chooses
Quantity of Output
Price
Total Cost
Average Total Cost
Total Revenue
Profits
1
2
3
4
5
6
7
8
9
Explanation / Answer
You start off with quantity Q in your column.
Let's take Q = 5 as our example.
When Q=5, what does price equal?
P = 27 - 3Q = 27 - 3*5 = 27 - 15 = 12
What does total cost equal? Total cost is the sum of all costs, so if you have fixed cost of 24, and cost per unit (aka marginal cost) of 3, then total cost = 24 + 3*Q = 24 + 3*5 = 24 + 15 = $39
What is average total cost? The total cost per unit.
Total cost = 39
Number of units = 5
Average total cost = 39 / 5 = $7.8
Total revenue is equal to price multiplied by quantity (the money you make)
Total revenue = Q * P = 5 * 12 = $60
And finally profit = total revenue minus total cost
this is the amount of money we're left with after we take all the money and pay all our costs
Profit = 60 - 39 = $21
That's just for Q=5.
Now repeat for each of Q=1, Q=2, Q=3, etc etc
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