PGP 2019

Assignment 2: Theory of the Firm & Cost

August 8, 2019

This is not a graded assignment. Attempt these questions after having solved for the
relevant questions at the end of chapters from Besanko text-book.

1. The mozzarella cheese market in Indore is a perfectly competitive market. All rms in
Indore use the same technology of production and face costs given by C(Q) = 9 + Q2
where Q is the quantity of mozzarella cheese that is produced. The entire industry faces
a demand curve given by D(P ) = 30 − P . The equilibrium price of a unit of cheese is
Rs. 10.

(a) What is the prot maximizing output supplied by each rm?

(b) How many rms will operate in this market in the short run?

(c) Contrast the prots of a rm and number of rms in this industry in the short and
long-run equilibrium. (Assume that there is no change in technology in the long
run.)

2. The cost function of a rm operating in competitive markets is given by C(q) = 4q 2 + 16.

1
 (a) Find variable cost, xed cost, average variable cost, and average xed cost.

(b) What is the output that minimizes average cost?

(c) At what range of prices will the rm produce a positive output?

(d) At what range of prices will the rm earn a negative prot?

3. A competitive rm with a production function of q = 9l1/2 in the short run has xed
costs of $1000, and l is the variable input, whose cost is $4000 per unit.

(a) What is the total cost of producing a level of output q ?

(b) Write down the equation for the supply curve.

(c) If price is $1000, how many units will the rm produce?

4. Phool Kumari wants to open a ower shop in a mall. The monthly rental will be Rs. 1 a
square foot. She estimates that if she has F square feet of oor space and sells y bouquets
a month, her variable cost will be cv (y) = y 2 /F per month. If she has 200 square feet of
oor space, write down her marginal cost and average cost functions. At what amount
is the average cost minimized? At this level of output, how much is the average cost?

5. In a competitive market, the supply and demand are P = 5 + 0.36Q and P = 100 − 0.04Q
respectively, where P represents price per unit in dollars, and Q represents rate of sales
in units per year. What is the deadweight loss if government introduces a price ceiling of
$40 per unit?