Microeconomics - Math Problem Example

1) Total Revenue = 200 * 40 = $8000 Total Costs = 2 2 4 = $10,000 Fixed Costs = 2+2 = $4000 Total Variable Costs = 4 1 = $6000 Overall Loss = 8000-10000 = ($2000)Looking at the data, one might say that it is not feasible for the company to be flying between the two cities as it implies a loss of $2000 (Total Revenue - Total Cost). However, rationality of the situation according to the economic analysis is that the firm should continue to operate and should fly between the two cities in the short-run.

The rational behind this decision is the fact that in this case firm is covering all its variable costs and generating revenue which is greater than total variable costs. This means that firm is contributing the amount over and above the variable costs to the fixed costs. For example, if the company decides not to fly, it will still incur the fixed costs as they are not related to the output. It will only save the variable costs. In this situation there's no revenue as firm's planes are lying idle.

In this situation the firm will still have to pay its insurance and incur depreciation incurring a loss of $4000. However, if it flies between the two cities it makes a loss of only $2000. Hence, it is better for the company to fly between the two cities. However, if it keeps on making losses and they extend to the long-run, then it is better for the firm to shut-off its operations and invest its capital in an industry, where it could make a normal profit.2)(1) Total product (2) Total var. cost (3) Total cost (4) AFC (5) AVC (6) ATC (7) MC 0 $ 0 $ 40 $__-___ $__-___ $__-___ -1 55 95405595$552 75 1152037.557.5203 90 13013.333043.33154 110 1501027.537.5205 135 17582735256 170 2106.6728.3335357 220 2605.7131.4237.

13508 290 330536.2541.2570a) At price of $52, the firm will produce 7 Units because at this stage it's P = MR. its profit in this case will be 52*7 = 364 - 260 = $104b) At the product price of $28, the production will fall to 5 units. At his point the firm will be making a loss of = 140 - 175 = ($35). Despite the loss, the firm will continue to produce as it covering its variable costs. c) At the product price of $22, there will be no production at all. Looking at the data, the firm will try to equate its price with MR and the resulting output according to this should be 2 units.

However, the revenue gained from this will be only $44, whereas the average costs will be $75, as a result the firm will not produce at all as its revenue is less than average costs and it will only increase the loss if the firm decides to go with the production.d)Product priceQuantity suppliedProfit (+) or loss (-)$72 8246 52 7 8445 73428 5 (35)22 0 (40)15 0(40) Price Industry Quantity Supplied 72 8*500 = 400052 350045 350028 250022 015 0e) Equilibrium Price = $52f) 7 Unitsg) 104/7 = $14.85h) (14.85 * 3500)/ 500 = $103.95 3)Since monopoly equates his MR = MC, to determine the level of production and since MR of monopolist is always above average revenue curve, the output produced by monopolist is always less than perfectly competitive industry and price charge is higher.

As a result of high pricing, part of consumer surplus is converted into producer surplus. As a result of this consumer surplus is lesser and producer surplus is greater in monopoly firm, as compared to a perfectly competitive firm.a) Price = $69, Quantity = 4 Units , Profit = 276 - 252 = $24b) Price = $51 Quantity = 6 Units, Profit = 306 - 351 = ($45)c) Price = $60, Quantity = 5 Units, Profit = 300 - 300 = 0d) The best situation is when the monopoly is charging a fair return price because in this quantity is greater than unregulated monopoly which means that consumers will be better-off.

Similarly, this situation allows monopolist to earn a normal profit unlike when monopolist charges a price equal to MC. If monopolist makes a loss, he will leave the industry and in order to retain him in the industry, it is necessary to allow him to make at least some profit or normal profit. All these conditions are fulfilled in the fair-return monopoly and hence it will lead to the efficient working in the industry.