Application Questions

A firm sells its product in a perfectly competitive market where other firms charge a price of $70 per unit. The firm’s total costs are C(Q) = 50 + 10Q + 2Q².

a. How much output should the firm produce in the short run?

[removed]units

b. What price should the firm charge in the short run?

$[removed]

c. What are the firm’s short-run profits?

$[removed]

d. What adjustments should be anticipated in the long run?

[removed]	Exit will occur since these economic profits are too low.
[removed]	Entry will occur until economic profits shrink to zero.
[removed]	No firms will enter or exit at these profits.

 

Problem 2

When the first Pizza Hut opened its doors back in 1958, it offered consumers one style of pizza: its Original Thin Crust Pizza. Since its modest beginnings, Pizza Hut has established itself as the leader of the $25 billion pizza industry. Today, Pizza Hut offers six styles of pizza, including Pan Pizza, Stuffed Crust Pizza, and its Hand-Tossed Style.

Pizza Hut’s strategy of rolling out new pizza offerings over time is consistent with the company competing in what type of market?

[removed]	Perfect competition
[removed]	Oligopoly
[removed]	Monopoly
[removed]	Monopolistic competition

What is the long-run profitability of this strategy?

[removed]	High economic profits
[removed]	Zero economic profits
[removed]	Negative economic profits

 

 

Problem 3

You are the manager of a monopoly, and your demand and cost functions are given by P = 300 – 3Q and C(Q) = 1,500 + 2Q², respectively.

a. What price–quantity combination maximizes your firm’s profits?

Price: $[removed]
Quantity: [removed]units

b. Calculate the maximum profits.

$[removed]

c. Is demand elastic, inelastic, or unit elastic at the profit-maximizing price–quantity combination?

d. What price–quantity combination maximizes revenue?

Price: $[removed]
Quantity: [removed]units

e. Calculate the maximum revenues.

$[removed]

f. Is demand elastic, inelastic, or unit elastic at the revenue-maximizing price–quantity combination?

 

Problem 4

You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($150 million last year) and a low marginal cost of producing the product ($0.50 per pill), your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.7 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current price of $1.50 per pill, the own price elasticity of demand for the drug is -2.

Based on this information, what can you do to boost profits?

[removed]	Reduce price.
[removed]	Keep price the same.
[removed]	Raise price.

 

 

Problem 5

You are the manager of a small U.S. firm that sells nails in a competitive U.S. market (the nails you sell are a standardized commodity; stores view your nails as identical to those available from hundreds of other firms). You are concerned about two events you recently learned about through trade publications: (1) the overall market supply of nails will decrease by 2 percent, due to exit by foreign competitors; and (2) due to a growing U.S. economy, the overall market demand for nails will increase by 2 percent.

Based on this information, should you plan to increase or decrease your production of nails?

[removed]	Increase output.
[removed]	It is not possible to tell with the given information.
[removed]	Leave output unchanged.
[removed]	Decrease output.

 

 

Problem 6

You are the general manager of a firm that manufactures personal computers. Due to a soft economy, demand for PCs has dropped 50 percent from the previous year. The sales manager of your company has identified only one potential client, who has received several quotes for 10,000 new PCs. According to the sales manager, the client is willing to pay $800 each for 10,000 new PCs. Your production line is currently idle, so you can easily produce the 10,000 units. The accounting department has provided you with the following information about the unit (or average) cost of producing three potential quantities of PCs:

	10,000 PCs	15,000 PCs	20,000 PCs
Materials (PC components)	$600	$600	$600
Depreciation	300	225	150
Labor	150	150	150
Total unit cost	$1,050	$975	$900

Based on this information, should you accept the offer to produce 10,000 PCs at $800 each?