College of Administrative and Financial Sciences

Problem Solving 2
Deadline: 04/04/2020 @ 23:59

Course Name: MICROECONOMICS Student’s Name:

Course Code: ECON101 Student’s ID Number:
Semester: 2 CRN:
Academic Year: 1440/1441 H

For Instructor’s Use only

Instructor’s Name: Mohamed Chakroun
Students’ Grade: Marks Obtained/Out of Level of Marks: High/Middle/Low

INSTRUCTIONS – PLEASE READ THEM CAREFULLY

 The Assignment must be submitted on Blackboard (WORD format only) via

allocated folder.
 Assignments submitted through email will not be accepted.
 Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
 Students must mention question number clearly in their answer.
 Late submission will NOT be accepted.
 Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
 All answered must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism).
 Submissions without this cover page will NOT be accepted.
Question 1 (10 Marks)
The following graph represents the situation of Sindbad’s caps, a firm selling caps in the perfectly
competitive caps industry.

1) How much output should Sindbad produce to maximize his profit, if the market price is equal
to $11? (2 marks)
Answer:
Under perfect competition, the profit maximisation point is determined where MR = MC. The
market price is $11 and the corresponding output is 100 Caps per day.

2) How much profit (loss) will he earn? (2 marks)

Answer:
The corresponding ATC at MR = MC is $9 per cap. So we can compute the total profit/loss
as;
Total Profit=( MR− ATC )∗Quantity
Total Profit=( 11−9 )∗100
Total Profit=2∗100
Total Profit=$ 200
 3) Indicate the profit (loss) area on the graph. (2 marks)
Answer:

4) Find the fixed cost paid by the firm. (2 marks)

Answer:
Average ¿ Cost =Average Total Cost −Average Variable Cost
Now, at Q = 100,
Average ¿ Cost =9−6
Average ¿ Cost =$ 3
Now,
¿ Cost =AFC∗Quantity
¿ Cost =3∗100
¿ Cost =$ 300
5) Suppose Sindbad decides to shut down. What would his loss be? (2 marks)

Answer:
In case of shutdown the price will be decreased as below as sindbad’s cap would not cover its

fixed cost, apart from not cover the variable cost.

In case of shutdown, his losses will be equal to

Loss = Cost – Revenue

Loss = (VC+FC) – Revenue

Question 2 (20 Marks)
The figure below shows the demand and cost curves for a monopolist. Assume there are no fixed
costs in the market and an unlimited number of units of the product can be produced at a marginal
cost of $5 per unit. As a result average total cost and marginal cost are the same.

Price a

b e
$7

c d f
$5 ATC = MC =
5

Demand

18 30 Quantity

MR

1) Find the output level and the price charged to consumers, when the monopolist is maximizing
its profit. (6 marks)
Answer:
The output level is determined where MR = MC. Thus it is 18 Units
The price can be determined on the Demand Curve corresponding to output level, $7
2) Find the monopoly’s total economic profit when it is maximizing its profit. (4 marks)
Answer:
 Since MC = AC and the profit maximising output of 18 units.
Therefore, the total economic profit will be;
Economic Profit=( Price− ATC )∗Quantity
In this case, AC=MC, so,
Economic Profit=( Price−MC )∗Quantity

Economic Profit=( 7−5 )∗18

Economic Profit=2∗18

Economic Profit=$ 36

3) Indicate the area of consumer surplus under monopoly. (2 marks)

Answer:

4) What would be the market price and the market quantity, if the industry in the figure was
perfectly competitive (Assuming a constant cost industry)? (4 marks)

Answer:
The market price under perfect competition will be $5 and the market quantity will be MC =
MC 18 Units.

5) Indicate the area of consumer surplus when the market is served by perfectly competitive
firms. (2 marks)
Answer:
6) What is the area of the deadweight loss from monopoly? (2 marks)

Answer: