ECON 661, Managerial Economics

| January 4, 2016

ECON 661, Managerial Economics Homework Assignment 4

Answer all questions and show all your work or justify your answers 1. Jack Brown owns a small factory where he makes T-shirts for sale. He rents a building for $30,000 per month and rents a machine for $20,000 a month. Those are his fixed costs. His total variable cost is given in the table below. The T-shirt industry is a perfectly competitive and anyone who enters will face the same costs of production as Jack’s. Quantity of T-shirts TVC

AVC ATC MC 0 $0

1,000 5,000

2,000 8,000

3,000 9,000

4,000 14,000

5,000 20,000

6,000 33,000

7,000 49,000

8,000 72,000

9,000 99,000

10,000 150,000

(4 pts each) a. Construct Jack’s AVC, ATC and MC schedules by filling the blanks in the table.

b. After completing the table, use the information (data) therein to answer the following questions. (Note: Solutions given based on any information other than what is contained in the table will not be accepted even if correct). (i) If the current market price for a T-shirt is $23 per unit, how many units of T-shirts should Jack produce in order to maximize profit in the short run?

(ii) Given your answer for part (i), what will his total profit (loss) be?

(iii) Will he stay in the industry or exit in the long run?

(iv) Suppose instead that the market price of T-shirt is $6 per unit, what is the profit maximizing quantity of T-shirts that Jack should produce?

(v) Given your answer for part (iv), what will his total profit be?

(vi) Will he stay in the industry or exit in the long run?

(vii) What is Jack’s break-even price? What is his shut down price (over what range of prices)?

2. A monopoly firm estimates the demand function (curve) for its output to be: Q = 1624 – 0.25P,

and its total variable cost function as

TVC = 24Q – 4Q2 + 1/3Q3

Where Q is output

(8 pts each) a. How many units should the firm produce to maximize profit?

b. What is the profit maximizing price of the output?

c. Should the firm actually produce in the short run or shut down?

In addition to its demand and TVC functions, the firm knows that its fixed cost is $22,000 per year.

d. How much profit (loss) does the firm make?

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