Show and explain all calculations. Provide detailed economic reasoning.
1. A competitive firm’s short run total cost function is given by
(a) Calculate the profit maximizing output and the resulting profit when price is $30.
(b) Calculate the profit maximizing output and the resulting profit when price is $80.
2. In a perfectly competitive industry each producer has a long run total cost function given by
where Q denotes the output of the individual firm.
The market demand for the product is
where Q and P denote the market output and price respectively.
Calculate the optimal output produced by each firm at the long run competitive equilibrium (LRCE).
Calculate the market price and market output at the LRCE.
(c) Calculate the number of firms at the LRCE.
3. A monopolist produces a product in one central production facility using the cost structure: TC = and sells it in two different markets with the following demand functions:
Market 1:
Market 2: ,
where .
Calculate the amounts of outputs, that the monopolist should produce and the prices that it should charge if it wants to maximize total profit. Calculate the amount of total profit.
4. The publisher of a book faces a demand curve for the book, P = 100 – Q, where Q is the number of books sold and P the price per copy of the book. The cost of producing the book (excluding the royalty payment) is given by, TC = 25Q + 200. The author of the book receives a royalty (r) of 10 percent, i.e., r = 0.1, for every book sold.
Is there a “conflict of interest” between the publisher who wants to maximize profit and the author who wants to receive as large an income as possible? Show and explain all your calculations. Be sure to determine the price charged by the publisher, number of copies sold, profit of the publisher and the income of the author. Explain why your conclusion does not depend on the specific demand and cost functions or the amount of the royalty.
( Hint: There is a “conflict of interest” if the optimal output, price, profit and royalty from the perspective of the author are different from those from the perspective of the publisher. Note that the cost of production does not include the total royalty paid by the publisher. For convenience, you may assume that 1 unit of Q represents 1000 copies of the book. It does not affect your calculations.)
5. Perloff Brander Ch.9, exercise 5.3 (both 3rd. and 2nd. edition)
A monopoly’s inverse demand function is p = Q-0.25A0.5, where Q is its quantity,
p is its price, and A is the level of advertising. Its constant marginal and average cost of production is 6, and its cost of a unit of advertising is 0.25. What are the firm’s profit-maximizing price, quantity, and level of advertising?