1.

a.

Number of Workers Number of Chairs APL MPL

1 10 10 -

2 18 9 8

3 24 8 6

4 28 7 4

5 30 6 2

6 28 4.67 -2

7 25 3.57 -3
b. Yes, increasing the number of workers decreases the MPL, meaning that more labor
contributes to less output, hence giving a diminishing returns to labor.
c. A limited amount of resources and inefficiencies. It is also stated that this operation is
conducted on the short run, meaning that the amount of capital is fixed, leading to a
limited supply of equipment, plant and machinery.

2.
a. 7 AM Average Cost = 50000/240 = $208.33
10 AM Average Cost = 50000/120 = $416.67
1 PM Average Cost = 50000/120 = $416.67
4 PM Average Cost = 50000/240 = $208.33

b. As a newly hired marketing consultant for SkyHigh Airlines, it is best to focus on the
10 AM and 1 PM flights since they are underutilized. By focusing on the two flights,
we can lower the average cost of these flights, making them more cost effective. Let’s
assume that the 7 AM and 4 PM flights are for people who need to commute for work
or other important stuff. The 10 AM and 1 PM flights are probably for people who
aren’t in a hurry to fly, usually for students, travelers, etc. By giving discounts or
promos, we can attract more people into taking the 10 AM and 1 PM flights, reducing
the average cost.

3.
 a. Fixed Cost = 300 + 55(0) = 300 thousand dollars = $300000
b. Variable Cost = 55(100) = 5500 thousand dollars = $5500000
Average Variable Cost = 5500/100 = 55 dollars per unit
c. 55 dollars per unit
d. Average Fixed Cost = 300000/100000 = 3 dollars per unit
e. Fixed Cost = 300000 + 50000 = 350000
Variable Cost = 45q
Interest rate = 3int

Total Cost = 350 + 45q + 3int

4.
1/2 1/2
a. 𝑞 = 10𝐿 𝐾 → 100 = 10 𝐿 𝐾 → 10 = 𝐿 𝐾 → 100 = 𝐿𝐾
C = xL+yK
C = (20)(20) + (80)(5) = 800
800 = 20L + 80K
40 = L + 4K
L = 40 - 4K

b.
1/2 1/2 140
𝑞 = 10𝐿 𝐾 → 140 = 10 𝐿 5 → 𝐿 = → 𝐿 = 39. 2
10× 5

C = (20)(39.2) + (80)(5) = 1184

c. q = 140
LK = 196
𝑀𝑃𝐿 𝑥
𝑀𝑃𝐾
= 𝑦

𝐾 𝑥 20 1 𝐿
𝐿
= 𝑦
= 80
= 4
→𝐾 = 4

K=7
C = (20)(28) + (80)(7) = 1120
 d. The answer is the same as C given it’s the most uncostly and optimal for 140 units of
output.

5.
a. The Fixed Cost is 50, and the Variable Cost is 0.5q^2
2
𝑇𝐶 50+0.5𝑞
b. Average Total Cost = 𝑞
= 𝑞

c. Based on the graph, the Average Total Cost is at its minimum at q = 10, the MC is 10
because MC = q and the ATC’s value is 10 as well.
d. Since the firms are in a competitive market, P = MC and P = q
e. q = P
Qs = nP
Qs = 9P
 f. Qd = Qs
Qd = 120 - P
Qs = 9P
120 - P = 9P
10P = 120
P = 12
Qd = 120 - P = 108

g. 2P = q
q = 12
Total Revenue = Pq
Total revenue = 12(12) = 144
2
Total Cost = 50 + 0. 5(12) = 122
Profit = 144-122 = 22
h. Yes, because they are earning profit of 22, which is above 0.
i. In the long run after many firms join the market, the supply will increase, therefore
reducing the equilibrium price and eventually the profits are going to go to 0.
The minimum price is 10, so q = 10
j. Qd = 120 - 10 = 110
Number of firms= Q/q = 110/10 = 11

6.
a. Qd = Qs
6500 -100P = 1200P
P=5
Q = 1200(5) = 6000
MC(q) = P
2𝑞
200
= 5

q = 500
Total Revenue = 5 x 500 = 2500
2
(500)
Total Cost = C(500) = 722 + 200
= 1972

Profit = 2500 - 1972 = 528

 b. In the short run, yes, because the economic profit is above 0 and firms are attracted to
join. However, in the long run, the more the firms in the market, the more the supply,
decreasing the equilibrium price making the profit lower, and eventually 0. So I
wouldn’t expect firms to join in the long run due to this occasion.
2
𝑞
𝐶(𝑞) 722+ 200
c. 𝐴𝑇𝐶(𝑞) = 𝑞
= 𝑞

2𝑞 𝑞
𝑀𝐶(𝑞) = 200
= 100

𝑞 722 𝑞
100
= 𝑞
+ 200

q = 380
P = 380/100 = 3.8

The profit is 0 because the price equals the minimum Average Total Cost.
2
𝑞
𝑇𝑉𝐶(𝑞)
d. 𝐴𝑉𝐶(𝑞) = 𝑞
= 200
𝑞

P = AVC(q)
AVC(q) = 380/200 = 1.9
Total Revenue = 1.9 x 380 = 722
2
380
Total Cost = 722 + 200
= 1444

Profit = 722 - 1444 = -722

7.
a. P = 11 - Q
TR = (P)(Q)
TR = (11-Q)(Q)
TR = 11Q - Q^2
𝑑𝑇𝑅
MR = 𝑑𝑄
= 11 − 2𝑄

AVC = MC since the average cost is a constant, the MC becomes one as well.
MC = MR
11 - 2Q = 6
Q = 2.5
P = $8.5
TR = (8.5)(2.5) = $21.25
 TC = (6)(2.5) = $15
Profit = TR - TC = $6.25

8.5−6
𝐿𝑒𝑟𝑛𝑒𝑟 𝐼𝑛𝑑𝑒𝑥 = 8.5
= 0. 2941

b. 7 = 11 - Q
Q=4
TR = (7)(4) = $28
TC = (6)(4) = $24
Profit = 28 - 24 = $4
The price ceiling reduced the company’s profit by $2.25
7−6
𝐿𝑒𝑟𝑛𝑒𝑟 𝐼𝑛𝑑𝑒𝑥 = 7
= 0. 143

Quantity produced increased, profit decreased and monopoly power decreased.

c. P = MC = $6
6 = 11 - Q
Q=5
6−6
𝐿𝑒𝑟𝑛𝑒𝑟 𝐼𝑛𝑑𝑒𝑥 = 6
=0

8.
a. MR = MC
𝑃−𝑀𝐶 1
𝑃
= |ϵ|

40−𝑀𝐶 1
40
= |−2|

MC = 20

𝑃 − 𝑀𝐶 40−20
b. 𝑀𝑎𝑟𝑘𝑢𝑝 = 𝑀𝐶
× 100 = 20
× 100 = 100%