Business Economics

1. Suppose that a perfectly competitive firms’ Total Cost function
is given by:
SRTC(q) = 50 + 80q –10q
2
+ .6q
3
a. What is fixed cost equal to? What is Variable Cost equal to?
b. What is Marginal Cost equal to? What is Average Variable Cost
equal to?
c. Find an equation for the inverse supply curve of the firm.
Hint: the supply curve presumes profit maximizing outputs at
any market price.
d. Below which market price (a number) will this firm choose to
produce 0 output?
e. Choose a market price that is between Average Cost and Average
Variable Cost. Will the firm choose to produce a positive
output level?
Depict this output level in a graph that includes all the
appropriate curves. Explain verbally (and with numbers) why
this firm would choose to produce the output you chose.
f. What does it mean by a firm to be a price taker? What is the
implication of this for the individual firms’ demand curve?
You must also mention in your answer the term elasticity
(correctly of course).
g. If the firm’s cost curve shifted down, what would this do to
the firm’s supply curve? Justify your answer with an example
using the short run total cost curve above.
Q2. Suppose there are two demand curves (e.g two different sets of
consumers) for a particular product (two distinct markets that can
be segmented-so somehow the consumers in one market cannot buy in
the other market and resale from lower priced consumers to higher
priced consumers is not possible).
The two demand curves are given by the following equations:
Q
1
= 14 –P
1
(group 1)
Q
2
= 12 – 2P2
(group 2)
a. Solve for the inverse demand curve for group 1 and then graph
the inverse demand curve with P on the vertical and Q on the
horizontal axis. In graphing this, I expect you to solve for the
actual values of the P axis and Q axis intercepts for both demand
curves. Also indicate the numerical value of the slope for the
curve. Repeat the same steps for the second group.
b. Calculate MR for each group above and graph on the graphs in
part a.
c. Suppose MC=AC is constant and equal to 2 for the firm (So the MC
curve applies for both groups (because it is the same supplier of a
single product for the two groups), although demand and MR are
unique to each group since the markets can be segmented. Find the
profit maximizing output, price and profits in each market. You may
assume that TC = AC*Q (cost per unit*number of units). Label the
correct price and quantity for each graph in part a.
d. What are the elasticities at the profit maximizing quantities
that you found in part c?
e. Can you say anything about how the price charged in each market
relates to the relative price elasticities of demand you calculated
in part d? Try to explain intuitively using an example of a real
product that you might consume, in which the supplier of a single
product can segment the market and in fact charge different prices
to two different groups.
f. Now suppose that the above firm cannot segment the two markets.
Solve for the single profit-maximizing price and quantity. What are
profits equal to?
3. In 2003 the following article was written by Thomas Michael
Power, ‘ Why are Lumber Mills Really Shutting Down’? Please read the
article below and explain both in words

and with clearly drawn
graphs what is causing some of these mills to shut down. You may
assume that prior to lumber prices falling that the firms were
operating at a zero economic profit long run equilibrium. Also, is
the author correct in his claim that accessing National Forest
timber will make the situation worse? Explain.

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