Written Assignment 3/Jimmy Morgan-Principles of Microeconomics – N.

Gregory Mankiw- Fifth

Edition – ISBN 0324-58998-0)
Answer all of the following questions. Title your assignment "Written Assignment 3," unless your
mentor directs otherwise. This assignment covers text chapters 13 through 17.

1. At its current level of production, a profit-maximizing firm in a competitive market receives

$12.50 for each unit it produces and faces an average total cost of $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? Profit = (12.50-10.00) * 1000= 2,500. Correct Based on the firm’s current revenue, I
believe this firm will remain in the market until its profit is zero. The firm’s marginal revenue is
greater than its marginal cost, it makes sense for it to remain in the market.

2. In order to determine whether time is being spent optimally, a commercial fisherman has
recorded the following information over the past year: "hours spent fishing" and "quantity of fish
caught." What is the marginal product of fishing for hour spent?

Hours/day Total Quantity of Fish (tons) Marginal Product

0 0 0
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 31 1

correct

3. The fisherman has a fixed cost of $200 per day and variable costs of $150 per hour (wages
and fuel).
a. Fill in the information missing in the following table.

Hours/ Total Fixed Total Variable Marginal

Total Costs
day Costs Costs Costs
0 0 0 0 0
1 $200 $150 $350 $350
2 $400 $300 $700 $350
3 $600 $450 $1050 $350
4 $800 $600 $1400 $350
5 $1000 $750 $1750 $350
6 $1200 $900 $2100 $350

Fixed costs do not change. They stay the same no matter how many units are
produced. This is why they are referred to as fixed costs.
Written Assignment 3/Jimmy Morgan-Principles of Microeconomics – N. Gregory Mankiw- Fifth
Edition – ISBN 0324-58998-0)
Hours/ Total Variable
Total Fixed Costs Total Costs Marginal Costs
day Costs
0 $200 0 $200
1 $200 $150 $350 $150
2 $200 $300 $500 $150
3 $200 $450 $650 $150
4 $200 $600 $800 $150
5 $200 $750 $950 $150
6 $200 $900 $1100 $150

b. The fish sell for $100 a ton. How many hours fishing per day will he work in order to
earn a maximum profit on his day's activity? And how much is that profit? Please show all
your calculations.
Per day Fixed costs $200
Variable costs per hour $150
Total costs = $200 + $150 * X
Fish sell for $100 a ton
In a day of 24 hours the total cost = $200+24*150
= $3800

In a 24-hour period, the fisherman would have to catch 38 tons of fish to cover his total
cost. Maximum profit depends on how many tons of fish he will catch on a single day
which he cannot control. Some days, there may be times he catches no fish at all.
Based on this we can only assume that in a 24 hour period, if he catches a
minimum of 38 tons of fish to cover his total cost, then he will earn a maximum profit.

Hours/
Total Costs Marginal Costs Total Revenue Marginal Revenue Profits
day
0 $200 0 0 -$200
1 $350 $150 1000 $1000 650
2 $500 $150 1800 800 1300
3 $650 $150 2400 600 1750
4 $800 $150 2800 400 2000
5 $950 $150 $3000 $200 $2050
6 $1100 $150 3100 100 2000

See the highlighted row for the answer.

4. Under what conditions should a firm shut down production in the short run? Under what
conditions should a firm shut down in the long run? Explain the difference between the short
and long run conditions. In the short run, when a firm’s revenue received from the sale of a
good or service does not cover at least the variable costs of production, it should shut down.
Written Assignment 3/Jimmy Morgan-Principles of Microeconomics – N. Gregory Mankiw- Fifth
Edition – ISBN 0324-58998-0)
In the long run, if the price is less than the average total cost, the firm should seriously
consider shutting down. The difference between the two is the short run shut down refers to a
decision not to produce anything during a specific period of time because of current market
conditions and the firm still incurs fixed costs whereas a long run decision the firm does not
incur fixed costs. Because they would be better off permanently shutting down.

5. Define and explain the relationship between total revenue, average revenue, and marginal
revenue for a monopolist. What is monopoly profit? Should a monopolist produce quantities of
product greater than that which would maximize profits? A monopolist’s total revenue is the
quantity of products sold time the price the product is sold at and the average revenue of a
monopolist, relates to the amount of total revenue received minus the price the good is being
sold at. A monopolist’s marginal revenue is the amount of revenue a firm receives for each
additional sale of a product measured by taking the change in total revenue when the output
increases by a single unit, which means the marginal revenue will always be less than the
price of a good or service. A monopoly profit is an economic profit that is great than normal
profit. It is gained from lack of viable competition in a market, which allows a monopolist to set
its prices above the equilibrium price for a good or service without losing profits to any
competitor. A monopolist must produce quantities of product at the level of output that will
maximize its profit only. This is normally where marginal cost is equal to marginal revenue.
Producing more would only cause the demand curve to shift further downwards. correct

6. In what ways can a government create a monopoly? Why might a government do this? A
government can create a monopoly by granting patents and copy write protection to those who
have invented, produced or written a new product or book. This gives the inventor exclusive
rights and guarantees protection against anyone illegally manufacturing, printing, or selling the
product without the inventor’s permission. Governments normally do this because they believe
by doing so it will benefit the entire society however, on occasions, merely for political gain. A
government will also create a monopoly to encourage growth of a certain market. correct

Explain the output effect and the price effect for an oligopoly. How does each influence the
oligopolist's production decision? The output effect on an oligopoly firm when it considers adjusting
their production is weighing in the price of the product being greater than the marginal cost, thus
causing an increase in profit. Now the price effect on this (increasing the output), then raises the total
quantity sold thus causing the price of the product to fall and in turn means a lower profit. Why? The
reason is the key to the answer. Both output and price effects the oligopoly’s decision by either
raising the profit or lowering the profit depending on the decision made. the revenue from selling the
last unit at the market price must exceed the loss in revenue from selling all previous units at the new
lower price. Otherwise, profits will fall as output (production) is increased.

7.

8. What is a natural monopoly? How does a natural monopoly lead to lower costs than would
exist if there were more than one firm in an industry that is a natural monopoly? . A natural
monopoly occurs when one single firm discovers that the economic scale, maximum efficiency
and distribution of a particular industry are profitable. If more firms were to compete for power
in this natural monopoly, it would mean both would have to pay the fixed cost associated with
building or manufacturing the system needed whereas if one firm sets up this system or
network, it can produce any amount of output at least cost. A larger amount of firms involved
in the natural monopoly means less output per firm and higher average total costs. correct
Written Assignment 3/Jimmy Morgan-Principles of Microeconomics – N. Gregory Mankiw- Fifth
Edition – ISBN 0324-58998-0)
9. Entry of firms in a monopolistically competitive industry is characterized by two "external"
effects. What are these effects and how do they affect a monopolistically competitive firm. How
are consumers and incumbent firms influenced by these externalities? Externalities that affect
a monopolistically competitive industry are the product-variety externality, which creates
consumer surplus in the new market however, is a positive externality and the business-
stealing externality, which causes other firms in the market to lose customers and profits and
reduces existing surplus, which is a negative externality. Because of these externalities, at
any given time a monopolistically competitive market can have too many or not enough
products thereby raising or lowering surplus. Consumers see new firms entering this market
with new products as a way to get a similar product that they want or demand for a lower price
(consumer surplus) and firms see entry into this market as profit especially if the market is
economically sound. correct

10. Does a monopolistic competitor produce more or less output as compared to an efficient level
of production? Explain. What are the benefits and drawbacks of this? Should the government
intervene to alter this? A monopolistic competitor produces less output than an efficient level
of production since it is produced at a quantity at which marginal cost equals marginal revenue
and then uses the demand curve to determine the price consistent with this quantity whereas
an efficient level of production is achieved when a product is created at its lowest average total
cost. In many cases it is more profitable for a monopolistic competitor to operate with excess
capacity however, it prices normally exceeds marginal total cost because it has market power.
Because it has a markup over marginal cost, some products do not sell because consumers
value the product at a lower price thus causing deadweight losses. The government should
not intervene because intervention could cause more harm than good. Because monopolistic
competitors in some cases are earning no profit already, requiring them to lower their prices
would only cause them to incur loses and in order to keep them in business, policy makers
would have assist these firms in covering these loses somehow. correct