ECON 620: Microeconomic Industry Analysis
Fall 2014
Question 
Max Points 
Earned Points 
Q1 
10 

Q2 
10 

Q3 
10 

Q4 
10 

Q5 
10 

Q6 
10 

Q7 
10 

Q8 
10 

Q9 
10 

Q10 
10 

Entire Marks 
100 
 Net income versus Revenue Maximization
A.Determine these profitmaximising and revenuemaximizing price/output combinations analytically.
Unit of measurements 
Monetary value 
Entire Gross 
Fringy Gross 
Entire Cost 
Fringy Cost 
Entire Net income 
Fringy Net income 

0 
60 
0 
60 
100000 
5 
100000 
55 

1000 
55 
55000 
50 
105000 
6 
50500 
44 

2000 
50 
100000 
40 
112000 
7 
12000 
33 

3000 
45 
135000 
30 
119500 
8 
15500 
22 

4000 
40 
160000 
20 
128000 
9 
32000 
11 

5000 
35 
175000 
10 
137500 
10 
37500 
0 

6000 
30 
180000 
0 
148000 
11 
32000 
11 

7000 
25 
175000 
10 
159500 
12 
15500 
22 

8000 
20 
160000 
20 
172000 
13 
12000 
33 

9000 
15 
135000 
30 
185500 
14 
50500 
44 

10000 
10 
100000 
40 
200000 
15 
100000 
55 

To happen the profitmaximising end product degree analytically, set MR = MC, or put M? = 0, and work out for Q. Because
MR = MC
$ 60 – $ 0.01Q = $ 5 + $ 0.001Q
0.011Q = 55
Q = 5,000
At Q = 5,000,
P = $ 60 – $ 0.005 ( 5,000 )
= $ 35
? = – $ 100,000 + $ 55 ( 5,000 ) – $ 0.0055 ( 5,000 ) ?
= $ 37,500
( Note: M? ?/MQ? & A ; lt ; 0, This is a net income upper limit because entire net income is falling for Q & A ; gt ; 5,000. )
To happen the revenuemaximizing end product degree, set MR = 0, and work out for Q. Thus,
MR = $ 60 – $ 0.01Q = 0
0.01Q = 60
Q = 6,000
At Q = 6,000,
P = $ 60 – $ 0.005 ( 6,000 )
= $ 30
? = TR – Technetium
= ( $ 60 – $ 0.005Q ) Q – $ 100,000 – $ 5Q – $ 0.0005Q?
= – $ 100,000 + $ 55Q – $ 0.0055Q?
= – $ 100,000 + $ 55 ( 6,000 ) – $ 0.0055 ( 6,000 ) ?
= $ 32,000
( Note: M2 TR/MQ2 & A ; lt ; 0 and this is a gross upper limit because entire gross is diminishing for end product beyond Q & A ; gt ; 6,000. )
B.Given downward inclining demand and fringy gross curves and positive marginal costs, the profitmaximising price/output combination is ever at a higher monetary value and lower production degree than the revenuemaximizing priceoutput combination. This stems from the fact that net income is maximized when MR = MC, whereas gross is maximized when MR = 0. It follows that net incomes and gross are merely maximized at the same price/output combination in the improbable event that MC = 0. In prosecuting a shortterm gross instead than profitmaximising scheme, Presto can anticipate to derive a figure of of import advantages, including enhanced merchandise consciousness among consumers, increased client trueness, possible economic systems of graduated table in selling and publicity, and possible restrictions in rival entry and growing. To be consistent with longterm net income maximization, these advantages of shortterm gross maximization must be at least deserving Presto ‘s shortterm forfeit of $ 5,500 ( = $ 37,500 – $ 32,000 ) in monthly net incomes
 Demand and Supply Curves.
A.Calculate the equilibrium price/output combination
The equilibrium price/output relation is found by puting Q_{Calciferol}= Q_{Second}and work outing for P and Q: Q_{Calciferol}= Q_{Second}
500,000 – 50,000P = 100,000 + 100,000P
150,000P = 600,000
P = $ 4
Then, QD = QS
500,000 – 50,000 ( $ 4 ) = 100,000 + 100,000 ( $ 4 )
300,000 = 300,000
B.Calculate the surplus/shortage if the monetary value peers $ 2
If P= $ 2
Then,
Q_{Calciferol}= 500,000 – 50,000P
= 500,000 – 50,000 ( 2 )
= 500,000 – 100,000
= 400,000
Q_{Second}= 100,000 + 100,000P
= 100,000 + 100,000 ( 2 )
= 100,000 + 200,000
= 100,000
The measure demanded is more than measure supplied, therefore making a deficit.
 Calculate the surplus/shortage if the monetary value peers $ 5
If P= $ 5
Then,
Q_{Calciferol}= 500,000 – 50,000P
= 500,000 – 50,000 ( 5 )
= 500,000 – 250,000
= 250,000
Q_{Second}= 100,000 + 100,000P
= 100,000 + 100,000 ( 5 )
= 100,000 + 500,000
= 400,000
The measure supplied is more than measure demanded, therefore making a excess.
 Demand Function.The Creative Publishing Company ( CPC ) is a voucher book publishing house with markets in several emirates. CPC voucher books are sold straight to the populace. Operating experience during the past twelvemonth suggests the undermentioned demand map for CPC’s voucher books:
Q = 5,000 – 4,000P + 0.02Pop + 0.25I + 1.5A,
where Q is measure, P is monetary value ( $ ) , Pop is population, I is disposable income per family ( $ ) , and A is publicizing outgos ( $ ) .
 Determine the demand faced by CPC in a typical market in which P = $ 10, Pop = 1,000,000 individuals, I = $ 60,000, and A = $ 10,000.
Q = 5,000 – 4,000P + 0.02Pop + 0.25I + 1.5A,
Q = 5,000 – 4,000 ( 10 ) + 0.02 ( 1,000,000 ) + 0.25 ( 60,000 ) + 1.5 ( 10,000 )
= 5,000 – 40,000 + 20,000 + 15,000 + 15,000
= 15,000
 Calculate the degree of demand if CPC increases oneyear advertisement outgos from $ 10,000 to $ 15,000.
Q = 5,000 – 4,000 ( 10 ) + 0.02 ( 1,000,000 ) + 0.25 ( 60,000 ) + 1.5 ( 15,000 )
= 5,000 – 40,000 + 20,000 + 15,000 + 22,500
= 22,500
C.Calculate the demand curves faced by CPC in parts A and B.
 Elasticity.
 A monetary value decrease for personal computing machines will increase both the figure of units demanded and the entire gross of Sellerss.
Answer.True. A monetary value decrease ever increases units sold, given a downward sloping demand curve. The negative mark on the monetary value snap indicates that this is so the instance here. The fact that monetary value snap peers 5 indicates that demand is elastic with regard to monetary value, and that a monetary value decrease will increase entire grosss.
 The crossprice snap indicates that a 5 % decrease in the monetary value of personal computing machines will do a 20 % addition in package demand.
Answer.False. The crossprice snap indicates that a 5 % lessening in the monetary value of package plans will hold the consequence of increasing personal computing machine demand by 20 % .
 Demand for personal computing machines is monetary value elastic and computing machines are cyclical normal goods.
Answer.True. Demand is monetary value elastic ( see portion A ) . Since the income snap is positive, personal computing machines are a normal good. Furthermore, since the income snap is greater than one, personal computing machine demand is besides cyclical.
 Falling package monetary values will increase grosss received by Sellerss of both computing machines and package.
Answer.False. Negative crossprice snap indicates that personal computing machines and package are regards. Therefore, falling package monetary values will increase the demand for computing machines and ensuing grosss for Sellerss. However, there is no information refering the monetary value snap of demand for package, and hence, one does non cognize the consequence of falling package monetary values on package grosss.
 Optimal Input Usage.
A.Does Medical Testing Lab use reflect an optimum mix of proving equipment?
On a per hr footing, the relevant inquiry is
27/ $ 18,000/ ( 25 x 8 ) = 48/ $ 32,000/ ( 25 x 8 )
0.3 = 0.3
On a per month footing, the relevant inquiry is
27 ten ( 25 x 8 ) / $ 18,000 = 48 x ( 25 x 8 ) / $ 32,000
0.3 = 0.3
In both cases, the last dollar spent on each machine, increased end product by the same 0.3 units, bespeaking an optimum mix of proving machines.
B.If trials are conducted at a monetary value of $ 6 each piece labour and all other costs are fixed, should the company lease more machines?
For each machine hr, the relevant inquiry is
Testlogic1
MRPT = MPT ? MRQ = PT
27 ? $ 6 = $ 18,000/ ( 25 ? 8 )
$ 162 & A ; gt ; $ 90
Accutest3
MRPA = MPA ? MRQ = PA
48 ? $ 6 = $ 32,000/ ( 25 ? 8 )
$ 288 & A ; gt ; $ 160
Or, in per month footings:
Testlogic1
MRPT = MPT ? MRQ = PT
27 ? ( 25 ? 8 ) ? $ 6 = $ 18,000
$ 32,400 & A ; gt ; $ 18,000
Accutest3
MRPA = MPA ? MRQ = PA
48 ? ( 25 ? 8 ) ? $ 6 = $ 32,000
$ 57,600 & A ; gt ; $ 32,000
In both instances, each machine returns more than its fringy cost ( monetary value ) of employment, and enlargement would be profitable.
 Fringy Revenue Product of Labor.
A.Estimate Jones= oneyear ( 50 workweek ) fringy gross merchandise.
In the long tally, Jones marginal gross merchandise is the maximal sum Smart Motors could pay in base salary plus all periphery benefits.It is the sum of added gross after all other variablecosts that Jones attempt bringsto thefirm.In this instance, Jones marginal gross merchandise is determined by thenumber of autos sold and the net income part earned on each sale
MRPL = MPL ? MRQ
= ( Car gross revenues per twelvemonth ) ? ( Profit part per unit )
= ( 1.5 ?50 ) ? ( $ 1,000 )
= $ 75,000
Because Jones is merely engaged in the gross revenues map, Jones does non bring forth autos. What Jones does bring forth are carsales, and the benefit to the employer of Jones gross revenues attempt is what determines the sum the employer is willing and able topay.
B.Jones earns a basal wage of $ 60,000 per twelvemonth, and Smart Motors pays an extra 28 % of this base wage in revenue enhancements and assorted periphery benefits. Is Jones a profitable employee?
No.In addon to establish salary, employers must pay extra revenue enhancements and fringebenefits.All of these costs mustbe justified by the sum of fringy revenueproduct generated to warrant employment.In this instance, employment costsfor Jones are $ 76,800 ( = $ 60,000 ?1.28 ) .A comparing of fringy gross merchandise figures with these employment cost datasuggests:
MRPL = $ 75,000 & A ; lt ; $ 76,800 =PL
Therefore, Jones brings in $ 75,000 per yearin extra net income part, but costs Smart Motors $ 76,800.This agencies that Jones brings in $ 1,800 per twelvemonth less in net marginal grosss than the fringy cost ofemployment.At the border, Jones’s employment represents a fringy loss to Smart Motors.Jones is non a profitable employee.
 Minimum Efficient Scale Estimation.
A.Estimate minimal efficient graduated table in this industry.
Minimum efficient graduated table is reached when mean costs are first minimized. This occurs at the point where MC = AC.
Average Costss = AC = TC/Q
= ( $ 3,000 + $ 1,000Q + $ 0.003 Q? ) /Q
= $ 3,000/Q + $ 1,000 + $ 0.003Q
Therefore,
MC = AC
$ 1,000 + $ 0.006Q = $ 3,000/Q + $ 1,000 + $ 0.003Q
0.003Q = 3,000/Q
3,000/Q? = 0.003
Q? = 1,000,000
Q = 1,000 ( 000 ) or 1 million
( Note: Actinium is lifting for Q & A ; gt ; 1,000 ( 000 ) ) .
Alternatively, MES can be calculated utilizing the point cost snap expression, since MES is reached when ?C = 1.
?C =TC/Q ? Q/TC
( $ 1,000 + $ 0.006Q ) Q/ ( $ 3,000 + $ 1,000Q+ $ 0.003Q? ) = 1
1,000Q + 0.006Q? = 3,000 + 1,000Q + 0.003Q?
0.003Q? = 3,000
Q? = 1,000,000
QMES = 1,000 ( 000 ) or 1 million
B.In visible radiation of current PABX demand of 30 million units per twelvemonth, how would you measure the future potency for competition in the industry?
Potential Number of Efficient Competitors = Market Size/MES Size
= 30,000,000/1,000,000
= 30
Therefore, there is the possible for N = 30 expeditiously sized rivals and, hence, vigorous competition in Kanata ‘s industry
 Stable Competitive Equilibrium.
A.Calculate Bada Bing ‘s optimum end product and net incomes if bit monetary values are stable at $ 60 each.
Because the industry is absolutely competitory, P = MR = $ 60. Set MR = MC to happen the profitmaximising activity degree. From the entire costfunction note:
TC = $ 1,000,000 + $ 20Q + $ 0.0001Q?
MC = ?TC/?Q = $ 20 + $ 0.0002Q
Therefore,
MR = MC
$ 60 = $ 20 + $ 0.0002Q
0.0002Q = 40
Q = 200,000
? = TR – Technetium
= $ 60 ( 200,000 ) – $ 1,000,000 – $ 20 ( 200,000 ) – $ 0.0001 ( 200,000 ) ?
= $ 3,000,000
B.If Bada Bing is typical of houses in the industry, calculate the house ‘s longterm equilibrium end product, monetary value, and economic net income degrees.
In equilibrium, P = AC and MR = MC at the point where norm cost is minimized. To happen the point of minimal mean costs set MC = AC, and work out for Q:
MC = AC = TC/Q
$ 20 + $ 0.0002Q = ( $ 1,000,000 + $ 20Q + $ 0.0001Q? ) /Q
Q = 100,000
P = AC
= $ 40
? = TR – TC
= $ 40 ( 100,000 ) – $ 1,000,000 – $ 20 ( 100,000 ) – $ 0.0001 ( 100,000 ) ?
= $ 0
 Dynamic Competitive Equilibrium.WalMart and other film DVD retail merchants, including online sellers like amazon.com, use a twostep pricing policy. During the first six months following a theatrical release, film DVD purchasers are willing to pay a premium for new releases. Entire and fringy gross dealingss for a typical freshly released film DVD are given by the undermentioned dealingss:
TR = $ 28Q – $ 0.0045Q^{2}
MR = ?TC/?Q = $ 28 – $ 0.009Q
Entire cost ( TC ) and fringy costs ( MC ) for production and distribution are:
TC = $ 4,500+ $ 3Q + $ 0.0005Q^{2}
MC = ?TC/?Q = $ 3 + $ 0.001Q
where Q is in 1000s of units ( DVDs ) . Because units are in 1000s, both entire grosss and entire costs are in thousand of dollars. Entire costs include a normal net income.
A.Use the fringy gross and fringy cost dealingss given above to cipher DVD end product, monetary value, and economic net incomes at the profitmaximising activity degree for new releases.
Set MR = MC to happen the profitmaximising activity degree:
MR=MC
$ 28 $ 0.009Q= $ 3+ $ 0.001Q
0.01Q=25
Q=2,500 ( 000 )
P = TR/Q
= ( $ 28Q $ 0.0045Q? ) /Q
= $ 28 – $ 0.0045Q
= $ 28 $ 0.0045 ( 2,500 )
= $ 16.75
? = TR–TC
= $ 28Q $ 0.0045Q? – $ 4,500 – $ 3Q $ 0.0005Q?
= $ 25Q $ 0.005Q? – $ 4,500
= $ 25 ( 2,500 ) – $ 0.005 ( 2,500 ) ? – $ 4,500
= $ 26,750 ( 000 )
B.After six months, pricesensitive DVD purchasers appear willing to pay no more than $ 6 per DVD. Calculate the equilibrium priceoutput activity degree in this state of affairs. Is this a stable equilibrium?
In a absolutely competitory industry, P = MR = MC in equilibrium.Thus, six months after the initial theatrical release, P = MC= $ 6 would result.Set P= MR =MC to happen the profitmaximising activity degree:
MR = MC
$ 6 = $ 3+ $ 0.001Q
0.001Q = 3
Q = 3,000 ( 000 )
? =TR–TC
= $ 6 ( 3,000 ) – $ 4,500 – $ 3 ( 3,000 ) – $ 0.0005 ( 3,000 ) ?
= $ 0 ( 000 )
Because merely normal net incomes are being made, this is a stable equilibrium in the market and there will be no inducement for entry or issue.
 Monopoly versus Competitive Market Equilibrium.
A.Calculate the profitmaximising price/output combination and economic net incomes if MicroChips enjoys an effectual monopoly because of patent protection.
The profitmaximising price/output combination is found by puting MR = MC. Because AVC is changeless, MC = AVC = $ 4,500. Therefore:
MR = MC
$ 5,500 – $ 0.01Q = $ 4,500
0.01Q = 1,000
Q = 100,000
P = $ 5,500 – $ 0.005 ( 100,000 )
= $ 5,000
Economic Net incomes = P Q – AVC Q
= $ 5,000 ( 100,000 ) – $ 4,500 ( 100,000 )
= $ 50,000,000
( Note: As a monopolizer, the company is the industry ) .
B.Calculate the price/output combination and entire economic net incomes that would ensue if rivals offer ringers that make the market absolutely competitory.
In a competitory market, P = MC. In this case, AVC is changeless and, hence, MC = AVC. Competitive market equilibrium occurs where:
P = MC = AVC
$ 5,500 – $ 0.005Q = $ 4,500
0.005Q = 1,000
Q = 200,000
P = $ 5,500 – $ 0.005 ( 200,000 )
= $ 4,500
Economic Net incomes = P Q – AVC Q
= $ 4,500 ( 200,000 ) – $ 4,500 ( 200,000 )
= $ 0
In words, the transmutation from monopoly to hone competition has brought a $ 1,000 decrease in monetary value and a 100,000unit enlargement in end product. At the same clip, economic net incomes have been eliminated.
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