Principles of Microeconomics Assignment

1) "If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost" Give three examples of price discrimination. For each case, explain why the firm chooses to follow this strategy.

2) What are the main characteristics of a competitive market? Give two examples of government-created monopolies. Is creating a monopoly necessarily bad public policy in these cases; why or why not?

3) Many small boats are made of fiberglass and a resin derived from crude oil. Suppose that the price of oil rises. A publisher faces the following demand schedule for the next novel in a series.

Price Quantity Demanded

$100 0

90 100,000

80 200,000

70 300,000

60 400,000

50 500,000

40 600,000

30 700,000

20 800,000

10 900,000

0 1,000,000

The author is paid $1 million to write the book and the marginal cost of publishing a book is constant and $10 per book.

a) Add columns to the table above and compute the total revenue for each price and marginal revenue. At what quantity and price does marginal revenue equal marginal cost? How does

Does marginal cost compare to the price?

b) Add columns to the table above and compute the fixed costs, variable cost, total cost, and profit. What quantity and price result in the highest profit level?

c) Graph the demand, marginal revenue, and marginal cost curves. Label each curve as well

as each axis.

d) Suppose the publisher was concerned with maximizing economic efficiency rather than profits. What price would if a charge for the book? How much profit would it make at this

price?

e) If the author were paid $2 million rather than $1 million, would this affect the publisher's decision regarding what price to charge? Why or why not?

f) Calculate the deadweight loss that results in this market.

4) The residents of a small hub city all love historical folklore and propose creating a museum. The museum has a fixed cost of $4,800,000 and no variable costs. There are 200,000 residents in the town, and each has the same demand for museum visits Q_D = 10 - P, where P is the price for admission and Q is the number of visits.

a) Graph the museum's average total cost curve and its marginal cost curve. What kind of

does the market describe the museum?

b) The mayor proposes financing the museum with a lump-sum tax of $24 on each resident and then opening the museum to the public for free. How many times would each person visit? Calculate the benefit to each person with this proposal (calculated as the consumer

surplus minus the tax).

c) The city opposes taxes and requires the museum to charge an admission fee. What is the lowest price the museum can charge without incurring a loss? (Hint: Find the number of

visits and profit for each price, $2, $3, $4, and $5.)

d) For the break-even price that you calculated in part c, calculate the consumer surplus for each person.

e) What real-world considerations absent in the problem might provide a reason to favor an admission fee?

f) Compare the two proposals (tax versus admission fee), who is better off with the fee and

who is worse off?