MB 515: Economic Theory and Application Problem Set 4 4.1 Answer the questions below using the cost curves for the price-taking firm shown in the following graph: SMC 80 / 80 - r ATC 4250 =k 3 = g L L o n AVC s B a g L 20 750 0- 1 A i 1 i A 1 A 0 1,000 2,000 3,000 4,000 Quantity a Ifprice is $60 per unit of output, draw the marginal revenue curve. The manager should produce units to maximize profit. b. Because average total cost is $ for this output. total cost is $ . The firm makes a profit of : d At units, profit margin (or average profit) 1s maximmzed. Why 1s this output level different from the answer to part a? Now suppose price falls to $20. e. Draw the new marginal revenue curve. The manager should now produce units to maximize profit. At this output level, average total cost1s $ average fixed costis and average variable cost is $ : f Total revenue is now $ and total costis $ . The firm makes a loss of $ g. Total variable cost 1s $ leaving $ to apply to fixed cost. h. If price falls below $ . the firm will produce zero output. Explain why. 4.2 The following graph shows demand, MR, and cost curves for a monopoly in the short run: Price and cosl (dollars) 0 1.000 2,000 3,000 4,000 5,000 &,000 7000 4.000 Cluantity a. Profit is maximized at a price of b. The profit-maximzing level of output 1s c. At the optimal level of output, total revenue 1s $ , total cost1s profitis . and d. Suppose the manager mistakenly wishes to maximize profit margin or profit per umit (1.e., P ATC), and sets price equal to $60. Profit margin at $60 1s per unit. The total profit eammed when price 1s 560 1s which 1s (less than, equal to, greater than) the profit in part . Explain using marginal analysis