Question No.2:Consider a firm in a perfectly competitive industry. The firm has just built a plant that cost $15,000.

Each unit of output requires $5 worth of materials. Each worker costs $3 per hour.
a) Based on the information above, fill in the following table.

Number of Worker Hours 0 25 50 75 100 125 150 175

Output (Q)

Fixed Cost (TFC)

Variable Cost (TVC) 0 575 900 1100 1275 1400 1500 1585

Total Cost (TC)

Marginal Cost (MC) 5.75 6.50 8.00 8.75 12.50 20.00 42.50

0 100 150 175 195 205 210 212

15000 15000 15000 15000 15000 15000 15000 15000

15000 15575 15900 16100 16275 16400 16500 16585

Average Variable Cost (AVC) 5.75 6.00 6.28 6.53 6.82 7.14 7.47

Average Total Cost (ATC) 155.75 106.00 92.00 83.46 80.00 78.57 78.23

b) If the market price is $12.50, how many units of output will the firm produce? Answer: The firm will produce 205 units.

c) At that price, what is the firms profit or loss? Will the firm continue to produce in the short run? Carefully explain your answer. Answer: The firms profit is *(12.50)(205)+ 16,400 = 2,562.50-16,400 = -$13.837.50. The firm is losing money, but if it were to shut down , it would lose $15,000 (its fixed costs); Thus, the lossminimizing choice is to stay in business in the short (as P>AVC) d) Graph your results.

Question No.4:Consider the following graph, which shows a demand curve and two supply curves. Suppose that there is an increase in demand.Compare the equilibrium price and quantity change in both case, and use those results to explain what you can infer about the elasticity of supply.

Answer: Supply Curve S2 is more elastic than supply curve S1. We can infer this because, for a given change in price, the change in quantity supplied is far greater on supply curve S2.

Question No.1:For each of the following graphs, identify the firms profit -maximizing (or lossminimizing) output. Is each firm making a profit? If not, should the firm continue to produce in the short run?

Question No.4: Demonstrate graphically why persuasive advertising, which makes consumers more loyal to the advertised brand, is likely to increase a firms market power. Will it necessarily increase profit as well?

Answer: For Simplicity, assume that marginal cost is constant. Persuasive advertising makes demand more inelastic and as elasticity decreases, the markup over marginal cost is greater. However, advertising also increases fixed costs, and thus whether profit rises depends on the effectiveness of advertising relative to its cost.

Question No.5: The top four firms in industry A have market shares of 30, 25, 10 and 5 percent, respectively. The top four firms in industry B have market shares of 15,12,8 and 4 percent, respectively. Calculate the four-firm concentration ratios for the two industries. Which industry is more concentrated?