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Econ 101, Fall 2018

Problem Set 3 (58 points)

Chapters 10, 13 & 14

Paper Copy Due 9:00 am, Wednesday, October 31

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1. (6 points) The city of Oberlin and Oberlin College take great pride in restoring historic buildings. Suppose that the demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50^threstored historic building entails the following: a private cost of $800,000; a private value of $650,000; and a social value of $800,000.

1. Does the restoration of historic buildings create a positive or negative externality? What is the amount of the external cost or external benefit? (2 points)

• Is the market equilibrium quantity of restored historic buildings less than, equal to, or greater than 50? (1 point)
• Is the socially optimal quantity of restored historic buildings less than, equal to, or greater than 50? (1 point)
• If your answers to (b) and (c) are different, explain why and explain how the government could impose a tax or provide a subsidy to move the market equilibrium to the social optimum. (2 points)

2. (5 points) Consider the market for plastics. Suppose the demand for plastics is given by and plastics are supplied in a competitive market by  . Suppose each unit of plastic that is produced results in external damage of $12.

1. What is the market equilibrium quantity and price of plastics? What is the socially efficient quantity of plastics? If your answers differ, why is this the case? (4 points)

1. In order to reach the social optimum, what level tax could the government impose per unit of plastics? (1 point)

3. (17 points) Consider the following schedule of costs for a local florist considering how many workers to hire. The florist spends $50 a day in rent and equipment leases. Labor is the florist’s only variable input and employees are paid $100 per day. The output is the number of bouquets the workers can produce in total each day.

Number of workers (L)	Number of bouquets (Q)	Marginal product of labor (MPL)	Fixed Cost (FC)	Variable Cost (VC)	Total cost (TC)	Average total cost (ATC)	Average variable cost (AVC)	Marginal cost (MC)
0	0	–
1	20
2	50
3	90
4	120
5	140
6	150
7	155

1. Use the information given to fill in the marginal product of labor and the firm cost columns. (7 points)

1. What pattern do you see in the average total cost column? (2 points)

1. Explain the pattern you see in the florist’s marginal cost column. Compare the column for marginal product with the column for marginal cost. Explain the relationship (2 points)

1. Compare the column for marginal cost to the florist’s column for average total cost. Explain the relationship. (2 points)

1. If the florist can sell bouquets for $6 per bouquet, what is the profit-maximizing level of bouquets? (4 points)

  

4. (12 points) Ball Bearings, Inc. faces costs of production as given in the below table.

1. Calculate the company’s average fixed cost, average variable cost, average total cost, and marginal cost at each level of production. (4 points)

Q	TFC	TVC	AFC	AVC	ATC	MC
0	$100	$0	—-	—-	—-	—-
1	100	50
2	100	70
3	100	90
4	100	140
5	100	200
6	100	360

50. The price of a case of ball bearings is $50. Seeing that they can’t make a profit, the chief executive officer (CEO) decides to shut down operations. What is the firm’s profit/loss? Was this a wise decision? Explain. (4 points)

 

1. Vaguely remembering their introductory economics course, the chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity. What is the firm’s profit/loss at that level of production? Was this the best decision? Explain. (4 points)

5. (8 points) Consider total cost and total revenue given in the following table:

Quantity	Total Cost	Marginal Cost	Total Revenue	Marginal Revenue	Profit
0	$8	—	$0	—
1	9		8
2	10		16
3	11		24
4	13		32
5	19		40
6	27		48
7	37		56

1. Calculate profit for each quantity. How much should the firm produce to maximize profit? (2 points)

1. Calculate marginal revenue and marginal cost for each quantity. Graph them, being sure to carefully label your axes and curves. At what point do these curves cross? How does this answer relate to your answer in part (a)? (4 points)

1. Can you tell whether this firm is in a competitive industry? If so, can you tell whether the industry is in a long-run equilibrium? (2 points)

6. (4 points) Suppose that a firm in a competitive market has the following cost curves:

1. If the market price is $6, what is the firm’s short-run economic profit (1 point)?

1. If the market price is $10, what is the firm’s total short-run economic profit?  (3 points)

7. (6 points total; 2 points each) Please answer true or false and support your answer with a 1-3 sentence explanation. If part of a statement is false, then the whole statement is false.

1. If a firm in a competitive market reduces its output by 20 percent, the price of its output is likely to increase.

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