Họ và tên: Chiêm Nguyên Bảo

MSSV: BAACIU21172

ASSIGNMENT 2
CHAPTER 13
Problem 8: The city government is considering two tax proposals:
- A lump-sum tax of $300 on each producer of hamburgers.
- A tax of $1 per burger, paid by producers of hamburgers.
a) Which of the following curves-average fixed cost, average variable cost, average
total cost, and marginal cost-would shift as a result of the lump-sum tax? Why?
Show this in a graph. Label the graph as precisely as possible.
As a result of lump-sum tax, the average fixed cost curve and the average total cost curve would
shift because the lump-sum tax increases the fixed cost but has no effect on marginal cost and
variable cost. Therefore, the fixed cost curve and the average total cost curve would shift upward.
(còn chèn graph)
b) Which of these same four curves would shift as a result of the per-burger tax? Why?
Show this in a new graph. Label the graph as precisely as possible.
The average cost curve, average total cost curve and marginal cost curve would shift because the
per-burger tax increases the variable cost per unit produced but has no effect on fixed cost.
Therefore, these three curves would shift upward. (còn chèn graph)
Problem 9: Jane’s Juice Bar has the following cost schedules:

a) Calculate average variable cost, average total cost, and marginal cost for each
quantity.
𝑉𝐶 ∆𝑇𝐶
AVC = MC =
𝑄 ∆𝑄

𝑇𝐶
ATC = 𝑄
 Marginal
Quantity Variable Cost Total Cost Average VC Average TC
Cost
0 $0 $30
$10
1 10 40 $10 $40
15
2 25 55 12.5 27.5
20
3 45 75 15 25
25
4 70 100 17.5 25
30
5 100 130 20 26
35
6 135 165 22.5 27.5

b) Graph all three curves. What is the relationship between the marginal-cost curve and
the average-total-cost curve? Between the marginal-cost curve and the average-
variable-cost curve? Explain.

45

40

35

30

25 AVC
ATC
20
MC
15

10

0
1 2 3 4 5 6

When the ATC is above the MC, then ATC is declining and MC cuts ATC at its minimum points
but when ATC starts increasing, then MC is above ATC.

As it can be seen in the diagram that Both MC and AVC are upward sloping and AVC is greater
than MC after 1 unit of output and at 1 unit of output both MC and AVC are equal.
CHAPTER 14
Problem 11: Suppose that each firm in a competitive industry has the following costs:
1
Total cost: 𝑇𝐶 = 50 + 2 𝑞 2

Marginal cost: 𝑀𝐶 = 𝑞
where q is an individual firm’s quantity produced. The market demand curve for this product is:
Demand: 𝑄 𝐷 = 120 − 𝑃
where P is the price and Q is the total quantity of the good. Currently, there are 9 firms in the
market.
a) What is each firm’s fixed cost? What is its variable cost? Give the equation for
average total cost.
1
The firm’s fixed cost is 50 and the firm’s variable cost is 2 𝑞 2
1
𝑇𝐶 50+ 𝑞 2 50 1
2
The equation for ATC is 𝐴𝑇𝐶 = = = + 2𝑞
𝑄 𝑞 𝑞

b) Graph average-total-cost curve and the marginal-cost curve for q from 5 to 15. At
what quantity is average-total-cost curve at its minimum? What is marginal cost
and average total cost at that quantity?
q ATC MC
5 12.5 5
6 11.33 6
7 10.64 7
8 10.25 8
9 10.05 9
10 10 10
11 10.04 11
12 10.16 12
13 10.35 13
14 10.57 14
15 10.83 15
 16

14

12

10

0
5 6 7 8 9 10 11 12 13 14 15

ATC MC

At q = 10, the ATC at its minimum and ATC = MC = 10.

c) Give the equation for each firm’s supply curve.
Each firm’s supply curve is its MC. So the function is 𝑀𝐶(𝑃) = 𝑞
d) Give the equation for the market supply curve for the short run in which the
number of firms is fixed.
The market supply curve for the short run, where the number of firms is fixed, is the horizontal
summation of each firm's supply curve. Since there are 9 firms in the market, the market supply
curve equation is Qs = 9q, where Qs is the total quantity supplied and q is the quantity supplied by
each firm.
e) What is the equilibrium price and quantity for this market in the short run?
In equilibrium: 𝑄𝐷 = 𝑄𝑆 = 120 − 𝑃 = 9𝑞 ↔ 𝑃 = 120 − 9𝑞
120 − 𝑃
↔𝑞=
9
f) In this equilibrium, how much does each firm produce? Calculate each firm’s profit
or loss. Is there incentive for firms to enter or exit?
In the short-run equilibrium, each firm will produce the quantity that corresponds to the
equilibrium price. To find the quantity produced by each firm, we substitute the equilibrium price
into the supply curve equation P = 0.5q.
Profit or loss for each firm can be calculated by subtracting the total cost (TC) from the total
revenue (TR). If TR > TC, the firm makes a profit, and if TR < TC, the firm incurs a loss.
Whether there is an incentive for firms to enter or exit depends on the profit or loss. If firms are
making a profit, there is an incentive for new firms to enter the market. If firms are incurring losses,
there is an incentive for firms to exit the market.
g) In the long run with free entry and exit, what is the equilibrium price and quantity in
this market?
In the long run with free entry and exit, the market will adjust until firms are making zero economic
profit. This occurs when the price (P) equals the average total cost (ATC).
50 1
𝑃 = 𝐴𝑇𝐶 = + 𝑞
𝑞 2
50 1
↔ 𝑄𝐷 = 120 − 𝑃 = 120 − ( + 𝑞)
𝑞 2
h) In this long-run equilibrium, how much does each firm produce? How many firms
are in the market?
The number of firms in the market in the long-run equilibrium depends on the market demand and
the quantity produced by each firm. If the market demand is greater than the quantity produced by
each firm, new firms will enter the market. If the market demand is less than the quantity produced
by each firm, firms will exit the market.
CHAPTER 15
Problem 9: Only one firm produces and sells soccer balls in the country of Wiknam, and as
the story begins, international trade in soccer balls is prohibited. The following equations
describe the monopolist’s demand, marginal revenue, total cost, and marginal cost:
Demand: 𝑃 = 10 − 𝑄
Marginal Revenue (MR): 𝑀𝑅 = 10 − 2𝑄
𝑻𝑪 = 3 + 𝑄 + 0.5𝑄 2
Marginal Cost (MC): 𝑀𝐶 = 1 + 𝑄
where Q is quantity and P is the price measured in Wiknamian dollars.
a) How many soccer balls does the monopolist produce? At what price are they sold?
What is the monopolist’s profit?
𝑀𝑅 = 𝑀𝐶 ↔ 10 − 2𝑄 = 1 + 𝑄 ↔ 𝑄 = 3
→ 𝑃 = 10 − 3 = $7
➔ The monopoly’s profit: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 − 𝑇𝐶 = 3 × 7 − (3 + 3 + 0.5 × 32 ) = $6
b) One day, the King of Wiknam decrees that henceforth there will be free trade—
either imports or exports—of soccer balls at the world price of $6. The firm is now a
price taker in a competitive market. What happens to domestic production of soccer
balls? To domestic consumption? Does Wiknam export or import soccer balls?
With free trade at the world price of $6, the domestic production of soccer balls will change.
Since the world price is lower than the monopolist's price of $7, the firm will no longer be able
to sell at that price. As a price taker, the firm will adjust its production to maximize profit at the
world price.
The new production quantity: 1 + 𝑄 = 6 ↔ 𝑄 = 5
➔ The firm will now produce 5 soccer balls. Domestic consumption will depend on the
difference between domestic production and the world price. Since domestic production
exceeds the world price, Wiknam will become an exporter of soccer balls.
c) In our analysis of international trade in Chapter 9, a country becomes an exporter
when the price without trade is below the world price and an importer when the price
without trade is above the world price. Does that conclusion hold in your answers to
parts (a) and (b)? Explain.
In this case, the conclusion from Chapter 9 analysis does not hold. In part (a), the monopolist's
price without trade was $7, which is higher than the world price of $6. However, in part (b), after
free trade was allowed, the domestic price became equal to the world price. Therefore, the
conclusion about becoming an exporter or importer based on the price without trade does not
hold.
d) Explain at what price of computers (in terms of shirts) the two countries might
trade.
If the American worker gives up 20 shirts to produce 1 computer, and the Chinese worker gives
up 10 shirts to produce 1 computer, a possible trade could occur at a price of 15 shirts per
computer.
e) Suppose that the world price was not $6 but, instead, happened to be exactly the
same as the domestic price without trade as determined in part (a). Would allowing
trade have changed anything in the Wiknamian economy? Explain. How does the
result here compare with the analysis in Chapter 9?
If the world price was the same as the domestic price without trade, there would be no incentive
for the firm to engage in international trade. The domestic price would already be at the world
price, so allowing trade would not change anything in the Wiknamian economy. This result
differs from the analysis in Chapter 9, where trade occurs when the domestic price is different
from the world price.
CHAPTER 16
Problem 7: Consider a monopolistically competitive market with N firms. Each firm’s
business opportunities are described by the following equations:
100
Demand: 𝑄 = −𝑃
𝑁
100
Marginal Revenue (MR): 𝑀𝑅 = − 2𝑄
𝑁

𝑻𝑪 = 50𝑄 + 𝑄 2
 Marginal Cost (MC): 𝑀𝐶 = 2𝑄

a) How does N, the number of firms in the market, affect each firm’s demand curve?
Why?
100
The demand function is linear and the horizontal intercept of the demand curve is , this means
𝑁
that the horizontal intercept of the individual firm declines as the number, N, of firms in the
market increases. A fall in horizontal intercept of the demand curve implies a leftward (or
inward) shift of the demand curve.
b) How many units does each firm produce?
𝑀𝑅 = 𝑀𝐶
100 100 25
↔ − 2𝑄 = 2𝑄 ↔ 4𝑄 = ↔𝑄=
𝑁 𝑁 𝑁
𝟐𝟓
➔ Each firm will produce units of output.
𝑵
c) What price does each firm charge?
25 100
= −𝑃
𝑁 𝑁
75
↔𝑃=
𝑁
𝟕𝟓
➔ Each firm will charge a price of dollars.
𝑵
d) How much profit does each firm make?

𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 − 𝑇𝐶 = 𝑃𝑄 − (50 + 𝑄2 )
75 25 25 1250
↔ × − 50 − ( )2 = − 50
𝑁 𝑁 𝑁 𝑁2
𝟏𝟐𝟓𝟎
➔ Each firm makes a profit of − 𝟓𝟎
𝑵𝟐
e) In the long run, how many firms will exist in this market?
In the long run, firms make zero profit:
1250
2
− 50 = 0 ↔ 𝑁 2 = 25 ↔ 𝑁 = 5
𝑁
➔ Only 5 firms will exist in the long run

CHAPTER 17
Problem 6: You and a classmate are assigned a project on which you will receive one
combined grade. You each want to receive a good grade, but you also want to avoid hard
work. In particular, here is the situation:
- If both of you work hard, you both get an A, which gives each of you 40 units of
happiness.
- If only one of you works hard, you both get a B, which gives each of you 30 units of
happiness.
- If neither of you works hard, you both get a D, which gives each of you 10 units of
happiness.
- Working hard costs 25 units of happiness.

a) Fill in the payoffs in the following decision box:

Your decision
Work Shirk

You: 15 You: 30
Work

Classmate: 15 Classmate: 5
You: 5 You: 10
Shirk

Classmate: 30 Classmate: 10
Classmate’s decision
b) What is the likely outcome? Explain your answer.
If I choose work: Mate work is 15, Mate shirk is 30 → Classmate chooses shirk
If I choose shirk: Mate work is 5, Mate shirk is 10 → Classmate chooses shirk
If mate choose work: I work is 15, I shirk is 30 → I chooses shirk
If mate choose shirk: I work is 5, I shirk is 10 → I chooses shirk
➔ The likely outcome is nash equilibrium (Shirk, shirk 10/10)
c) If you get this classmate as your partner on a series of projects throughout the year,
rather than only once, how might that change the outcome you predicted in part (b)?
If you get this classmate as your partner, the total happiness for both can be increased by
cooperation. → You are more likely to engage in cooperation.
d) Another classmate cares more about good grades: She gets 50 units of happiness for
a B and 80 units of happiness for an A. If this classmate were your partner (but your
preferences were unchanged), how would your answers to parts (a) and (b) change?
Which of the two classmates would you prefer as a partner? Would she also want you
as a partner?

If both works hard, both gets A and hence he gets 50 units of happiness and you get 25 units of
happiness. The cost of working hard is 15 units. Hence, the happiness for classmate is (50 - 15) =
35 units and your happiness is (25 - 15) = 10 units.

If you work hard and classmate shirks, both gets B and hence he gets 30 units of happiness and
you get 15 units of happiness. The cost of working hard is 15 units. Hence, the happiness for
classmate is 30 units and your happiness is (15 - 15) = 0 units.

If you shirk and classmate works hard, both gets B and hence he gets 30 units of happiness and
you get 15 units of happiness. The cost of working hard is 15 units. Hence, the happiness for
classmate is (30 - 15) = 15 units and your happiness is 15 units.

If neither works hard, both gets D and the happiness for each is 5 units.

Your decision
Work Shirk

You: 10 You: 15
Work

Classmate: 35 Classmate: 15
You: 0 You: 5
Shirk

Classmate: 30 Classmate: 5
Classmate’s decision

If classmate works hard, you can work hard with happiness 10 units or shirk with happiness 15
units. Hence, you will shirk with more happiness. If classmate shirks, you can work hard with
happiness 0 units or shirk with happiness 5 units. Hence, you will shirk with more happiness.
Hence, you have a dominant strategy to shirk.
If you work hard, classmate can work hard with happiness 35 units or shirk with happiness 30
units. Hence, classmate will work hard with more happiness. If you shirk, classmate can work hard
with happiness 15 units or shirk with happiness 5 units. Hence, classmate will work hard with
more happiness. Hence, classmate has a dominant strategy to work hard.

➔ Therefore, the likely outcome is that your classmate work hard and you shirk.

In first case, the outcome is (shirk, shirk) = (5, 5) and in second case, the outcome is (work hard,
shirk) = (15, 15). Thus, your happiness is 5 with first classmate and 15 with second classmate.
Therefore, your happiness is more with second classmate. Hence, you would prefer
the second classmate as a partner.

With second classmate, only she works hard and you shirk. Hence, she would not want you as a
partner.

CHAPTER 21
Problem 3: You consume only soda and pizza. One day, the price of soda goes up, the price
of pizza goes down, and you are just as happy as you were before the price changes.
a) Illustrate this situation on a graph.

b) How does your consumption of the two goods change? How does your response
depend on income and substitution effects?
An increase in the price of soda and a decrease in the prize of pizza will make the budget line a
little steeper. There will be less consumption of soda and more consumption of pizza. Since the
consumer remains equally happy, there is only substitution effect to consider.
Problem 7: A college student has two options for meals: eating at the dining hall for $6 per
meal or eating a Cup O’ Soup for $1.50 per meal. Her weekly food budget is $60.

a) Draw the budget constraint showing the trade-off between dining hall meals and
Cups O’ Soup. Assuming that she spends equal amounts on both goods, draw an
indifference curve showing the optimum choice. Label the optimum as point A
𝑃𝑑ℎ = $6
𝑃𝑐𝑠 = $1.5
I = $60
𝐼 60
𝑄𝑑ℎ = 𝑃 = = 10
𝑑ℎ 6

𝐼 60
𝑄𝑐𝑠 = 𝑃 = 1.5 = 40
𝑐𝑠

b) Suppose the price of a Cup O’ Soup now rises to $2. Using your diagram from part
(a), show the consequences of this change in price. Assume that our student now
 spends only 30 percent of her income on dining hall meals. Label the new optimum as
point B.
The change in price decreases the intercept for meals at Cup O’ Soup. The budget line associated
with higher price is the green line shown in the graph.
It is given that 30% of income is spend on meals of dining halls, thus: Dining halls spending is
$18, remaining $42 is spent Cup O’ Soup with new price $2.
18
𝑄𝑑ℎ𝐵 = =3
6
42
𝑄𝑐𝑠𝐵 = = 21
2

c) What happened to the quantity of Cups O’ Soup consumed as a result of this price
change? What does this result say about the income and substitution effects? Explain.
As the price of Cups O'soup increase, the quantity of the Cups O'soup consumedactually
increases. This means that the income effect is stronger than the substitutioneffect for Cups O'soup.
As the price of Cups O'soup increase, this student is likely toswitch over to substitutes (the
substitution effect), but the price increase makes thecollege student have relatively less income,
which in turn makes her buy more CupsO'soup. The income effect here is stronger than the
substitution effect.
d) Use points A and B to draw a demand curve for Cup O’ Soup. What is this type of
good called?
As the demand curve is positively sloping, a meal at Cups O' Soup is giffen good.