280 – 30 = 250

CHAPTER 14 270 > 25

In the short-run, Bob should continue because his total

revenue is greater than his variable cost.
1. Answer
In the long-run, Bob should exit because his total
revenue is less than his total cost.

4. Answer

a. The firm should produce five or six units

to maximize profit.

b. Marginal revenue and marginal cost are

graphed in Figure 2. The curves cross at a
quantity between five and six units, yielding
the same answer as in Part (a).

2. Answer

Once you have ordered the dinner, its cost is sunk,

so it does not represent an opportunity cost. As a
result, the cost of the dinner should not influence
your decision about whether to finish it or not.

3. Answer

Short-run Long-run
TR > VC TR < TC
or Continue or Exit
P > AVC P < AVC c. This industry is competitive because marginal
P x Q = TR TR = 270 revenue is the same for each quantity. The
27 x 10 = 270 TC = 280 industry is not in long-run equilibrium, because
TC – FC = VC 270 < 280 profit is not equal to zero.
5. Answer
a.
b. The firm’s losses are the $100 of fixed costs that
it incurs whether or not it is producing anything.
This was not a wise decision, as if the firm were
producing 3 or 4 cases, it would only lose $40
(revenue would exceed fixed costs and cover
some of the variable costs).
c. The firm’s losses are still $100 at that level of
production. As explained above, the firm should
produce 3 or 4 cases.
6. Answer
a. The figure shows the curves of a typical firm in
the industry, with average total cost ATC1,
marginal cost MC1, and marginal revenue equal to
price P1. The long-run-supply curve is the marginal
cost curve above the minimum point of ATC1
b. The new process reduces Hi-Tech’s marginal
cost to MC2 and its average total cost to ATC2,
but the price remains at P1 because other firms
cannot use the new process. Thus Hi-Tech
produces Q2 units and earns positive profits
c. When the patent expires and other firms are
free to use the technology, all firms’ average-
totalcost curves decline to ATC2, so the market
price falls to P3 and firms earn zero profit
7. Answer
$10= average revenue and 50 units sold
8. Answer
a. Profit is equal to (P–ATC) × Q. Price is equal to
AR. Therefore, profit is ($10 –$8) × 100 = $200.
b. For firms in perfect competition, marginal
revenue and average revenue are equal. Since
profit maximization also implies that marginal
revenue is equal to marginal cost, marginal cost
must be $10.
c. Average fixed cost is equal to AFC/Q which is
$200/100 = $2. Since average variable cost is
equal to average total cost minus average fixed
cost, AVC = $8 − $2 = $6.
9. Answer
a. If firms are currently incurring losses, price must
be less than average total cost. However, because
firms in the industry are currently producing
output, price must be greater than average
variable cost. If firms are maximizing profits, price
must be equal to marginal cost.
b. The present situation is depicted in the figure
below. The firm is currently producing q1 units of
output at a price of P1.
 b. At a price of $11, quantity demanded is 200.
With marginal revenue of $11, each firm will
choose to produce 5 pies where their marginal
cost is closest to the marginal revenue without
exceeding marginal revenue. Therefore, there will
be 40 firms (= 200/5). Each producer will earn
total revenue of $55 ($11  5), total cost is $39, so
profit is $16
c. The market is not in long-run equilibrium
because firms are earning positive economic
profit. Firms will want to enter the market
c. The figure above also shows how the market
d. With free entry and exit, each producer will
will adjust in the long run. Because firms are
earn zero profit in the long run. Long-run
incurring losses, there will be exit in this industry.
equilibrium will occur when price is equal to
This means that the market supply curve will shift
minimum average total cost ($7). At that price,
to the left, increasing the price of the product. As
600 pies are demanded. Each firm will only
the price rises, the remaining firms will increase
produce 3 pies (the quantity at which, MC is
quantity supplied. Exit will continue until price is
closest to MR without exceeding MR) meaning
equal to minimum average total cost. Average
that there will be 200 pie producers in the market.
total cost will be lower in the long run than in the
short run. The total quantity supplied in the
market will fall.
11. Answer

a. The figure below illustrates the situation in the

10. Answer
U.S. textile industry. With no international trade,
a. the market is in long-run equilibrium. Supply
intersects demand at quantity Q1 and price $30,
with a typical firm producing output q1.

b. The effect of imports at $25 is that the market

supply curve follows the old supply curve up to a
price of $25, then becomes horizontal at that
price. As a result, demand exceeds domestic
supply, so the country imports textiles from
other countries. The typical domestic firm now
reduces its output from q1 to q2, incurring losses,
because the large fixed costs imply that average
total cost will be much higher than the price.
c. In the long run, domestic firms will be unable to
compete with foreign firms because their costs
are too high. All the domestic firms will exit the
industry and other countries will supply enough to
satisfy the entire domestic demand. 13. Answer

a. The figure below shows the current equilibrium

12. Answer in the market for pretzels. The supply curve, S1,

a. The firms' variable cost (VC), total cost (TC), intersects the demand curve at price P1. Each
marginal cost (MC), and average total cost (ATC) stand produces quantity q1 of pretzels, so the
are shown in the table below: total number of pretzels produced is 1,000 × q1.
Quantity VC TC MC ATC Stands earn zero profit, because price is equal to
1 $1 $17 $1 $17 average total cost.
2 $4 $20 $3 $10
3 $9 $26 $5 $8.67
4 $16 $32 $7 $8
5 $25 $41 $9 $8.20
6 $36 $52 $11 $8.67

b. If the price is $10, each firm will produce five

units, so there will be 5 × 100 = 500 units supplied
in the market.
c. At a price of $10 and a quantity supplied of five,
each firm is earning a positive profit because price
is greater than average total cost. Thus, entry will
occur and the price will fall. As price falls, quantity
demanded will rise and the quantity supplied by
each firm will fall.
d. The figure below shows the long-run industry
supply curve, which will be horizontal at minimum
average total cost.
b. If the city government restricts the number of
pretzel stands to 800, the industry-supply curve
shifts to S2. The market price rises to P2, and
individual firms produce output q2. Industry
output is now 800 × q2. Now the price exceeds
average total cost, so each firm is making a
positive profit. Without restrictions on the
market, this would induce other firms to enter the
market, but they cannot because the government
has limited the number of licenses.
c. No worries here.
d. The license fee that brings the most money to
the city is equal to (P2 - ATC2)q2, which is the
amount of each firm's profit.
CHAPTER 15
1. Answer
a. A profit-maximizing publisher would choose a
quantity of 400,000 at a price of $60 or a quantity
of 500,000 at a price of $50; both combinations
would lead to profits of $18 million.
b. Marginal revenue is always less than price.
Price falls when quantity rises because the
demand curve slopes downward, but marginal
revenue falls even more than price because the
firm loses revenue on all the units of the good
sold when it lowers the price.
c. Figure 1 shows the marginal-revenue, marginal-
cost, and demand curves. The marginal-revenue
and marginal-cost curves cross between quantities
of 400,000 and 500,000. This signifies that the firm
maximizes profits in that region.
d. The area of deadweight loss is marked “DWL” in
the figure. Deadweight loss means that the total
surplus in the economy is less than it would be if
the market were competitive, since the
monopolist produces less than the socially
efficient level of output.
e. If the author were paid $3 million instead of $2
million, the publisher wouldn’t change the price,
since there would be no change in marginal cost
or marginal revenue. The only thing that would be
affected would be the firm’s profit, which would
fall.
f. To maximize economic efficiency, the publisher
would set the price at $10 per book, since that’s
the marginal cost of the book. At that price, the
publisher would have negative profits equal to the
amount paid to the author.
3. Answer
a.
b. Profits are maximised at a price of $16 and
quantity of 50,000. At that point profit is
$550,000.
c. As Johnny’s agent, you should recommend that
he demand $550,000 from them, so he instead of
the record company receives all of the profit.
4. Answer
a. The table below shows total revenue and
marginal revenue for the bridge. The profit
maximizing price would be where revenue is
maximized, which will occur where marginal
revenue equals zero, since marginal cost equals
zero. This occurs at a price of $4 and quantity of
400. The efficient level of output is 800, since
that’s where price equals marginal cost equals
zero. The profit maximizing quantity is lower than
the efficient quantity because the firm is a
monopolist.
Larry wants to sell as many drinks as possible
without losing money, so he wants to set quantity
where price (demand) equals average cost, which
occurs at quantity QL and price PL in Figure 10.
Curly wants to bring in as much revenue as
possible, which occurs where marginal revenue
equals zero, at quantity QC and price PC. Moe
wants to maximise profits, which occurs where
marginal cost equals marginal revenue, at
quantity QM and price PM.

b. The company should not build the bridge

because its profits are negative. The most revenue
it can earn is $1,600,000 and the cost is
$2,000,000, so it would lose $400,000.
c. If the government were to build the bridge, it
should set price equal to marginal cost to be
efficient. But marginal cost is zero, so the
government should not charge people to use the 6. Answer
bridge.
d. Yes, the government should build the bridge,
because it would increase society’s total surplus.
As shown in Figure 7, total surplus has area 1/2 ×
8 × 800, 000 = $3, 200, 000, which exceeds the cost
of building the bridge.

5. Answer