Micro-Economics

1) (5 points) A firm estimates that its average variable cost function is:

AVC = 10 – 0.03Q + 0.00005Q2

The firm’s total fixed costs are equal to $600.

(a) Given this information, show the firm’s marginal cost for output levels 325 to 350 units.

(To answer the following questions, you will have to calculate the marginal costs for output levels outside the range of 325 to 350 units.)

(b) At what dollar amount and output level does AVC reach its minimum?

(c) If the market price for the product produced by this firm is $10 per unit:

i. How many units of output will the firm produce in the short-run?

ii. What is the firm’s profit or loss?

(d) If the market price for the product produced by this firm is $7 per unit:

i. How many units of output will the firm produce in the short-run?

ii. What is the firm’s profit or loss?

(e) If the market price for the product produced by this firm is $5 per unit:

i. How many units of output will the firm produce in the short-run?

ii. What is the firm’s profit or loss?

2) (5 points) In a number of countries around the world, governments are reducing the wages and benefits of public sector workers in order to reduce the cost of government and to control deficit spending. Show, using an appropriate diagram, how this reduction in the wages of government workers will affect the employment level of government workers (i.e., the number of workers employed by the government) in the long run. Assume that the government uses only labour and capital to produce government services.

3) (5 points) Suppose that a perfectly competitive industry is in long-run equilibrium. Then, the price of a substitute good decreases.

(a) Use appropriate diagrams, and describe in words, what will happen in the short-run to:

i. The market demand curve?

ii. The market supply curve?

iii. Market price?

iv. Market output?

v. The firm’s output?

vi. The firm’s profit?

Note that you will not need separate diagrams for...