BECN 100

Take-Home Assignment

Due at the beginning of the class on November 22/23/24, 2011

For Tuesday section, due date is Tuesday, November 22, 2011. For Wednesday, due date is Wednesday, November 23, 2011. For Thursday, due date is Thursday, November 24, 2011.

  • You can complete this assignment individually or as a group of up to 5 students. I strongly encourage you to complete the assignment as a group.
  • Total available mark for this assignment is 70
  • You can make a group with students from other sections to complete this assignment.

For example, if students from Tuesday section make a group with students from Thursday section, you must hand in your take-home assignment on the earlier due date, which is Tuesday, November 22, 2011.

  • I will not accept any late assignments. If you can’t come to the class, you must type the assignment and e-mail me as an attached file by 11:59PM on the due date.
  1. What effect will each of the following have on the price of wine, which are a normal product regarded by many consumers as a substitute for beer and a complement to cheese. (10 Marks)

a)A drop in the price of grapes.

b)An increase in the price of beer.

c)A decrease in the price of cheese.

d)A drop in the tax on wine.

e)A drop in the tax on beer but no change to the wine tax.

  1. “The price of potatoes will increase if their supply decreases. When the price of potatoes increases, their supply increases.” Change one of these statements so that they are consistent with each other. (2 Marks)
  1. During the 1990’s technological advances reduced the cost of computer chips. How do you think this affected the market for computers? For computer software? For typewriters? (6 Marks)
  1. Use the following table to answer this question.

PriceUnits of OutputTotal Cost

(Dollars)(Quantity demanded)(Dollars)TRProfit

102002,0002,0000

92602,2752,34065

83252,5502,60050

74052,8252,83510

64803,1002,880(220)

The demand and total cost schedules of a monopolist are presented in the table above. What price should a profit-maximizing monopolist charge? (4 Marks)

AFTER TEST

  1. Consider the following table of long-run total cost for three different firms: (6 Marks)

Quantity1234567

Firm A60708090100110120

Firm B 112439567596119

Firm C2134496685106129

Does each of these firms experience economies of scale or diseconomies of scale?

NEXT WEEK ATC 9per unit cost) is declining as you expand your output  economies of scale

Is increasing as you expand your output  d

  1. An airline is flying between two cities. The airline has the following costs associated with the flight:

Crew$4,000Plane daily depreciation$2,000

Fuel1,000Plane daily insurance2,000

Landing fee1,000

The airline has an average of 40 passengers paying an average of $200 for this flight.

Do you think the airline should be flying between the two cities? Evaluate from a

Short-run and long-run perspective. (6 Marks)

AFTER TEST

  1. Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs:

AFC20010066.67504033.3328.57

ATC101013.3203253.391.43

Qty of houses painted per month / 1 / 2 / 3 / 4 / 5 / 6 / 7
Variable Cost / $10 / $20 / $40 / $80 / $160 / $320 / $640

Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company? (8 Marks)

AFC + AVC = ATC

Choose the output with lowest ATC

  1. At its current level of production a profit-maximizing firm in a competitive market receives P = $12.50 for each unit it produces, and faces an average total cost of ATC = $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1000 units. What is the firm's current profit? What is likely to occur in this market and why? (4 Marks)
  1. Foreach ofthefollowingevents,whatwould betheappropriateelasticityto compute?Using themidpointmethod,computethiselasticity.Whatdoesyour answer tell you?(12 Marks)

a. When thepriceoftheatreticketsisreducedfrom$14.00to$11.00,ticketsales increasefrom1,200to1,350.

b. As averagehousehold incomein Canadaincreaseby10 percent,annual sales

of ToyotaCamry’s increasefrom 56,000 to 67,000.

c. Aftermajorfailure of Brazil’scoffee crop sent coffeeprices upfrom $3.00 per kilogramto $4.80 per kilogram, sales of teainCanadaincreasedfrom7,500

kg per month to 8,000 kg per month.

d. Anincreaseintheworlddemandforpulp(usedinproducingnewsprint)

increasesthe priceby 14percent.Annual Canadian production increases from

8milliontons to11 million tones.

  1. You are the chief financial officer for a firm that sells digital music players. Your firm has the following average total cost schedule:

QuantityAverage Total CostTCMC

600 players$300180,000

601 players 301180,901901

Your current level of production is 600 devices, all of which have been sold. Someone calls, desperate to buy one of your music players. The caller offers you P = MR = $550 for it? Should you accept the offer? Why or why not? (4 Marks)

MR>MC  YES

MR<MC  NO

  1. A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10. What are the average revenue, and how many units were sold? (4 Marks)

TR= 500 P * Q

MR=10

P=MR=10AR=TR/Q

  1. Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own catering business. To buy the necessary equipment, she withdrew $20,000 from her savings (which paid 3 percent interest per year) and borrowed $30,000 from her uncle, to whom she pays 3 percent interest per year. Last year she paid $25,000 for ingredients and had revenue of $60,000. She asked Louis, an accountant, and Greg, an economist, to calculate her profit for her. What did they say? (4 Marks)

Explicit Cost = (30000 * 0.3) + 25000 = 25900

ImC= 40000 + (2000x.3) = 40600

TR= 60000