ECON 214 HW WK 11
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PART 1. There are 13 questions. Answer ANY 10 questions. Additional questions answered will NOT be graded. Each question is worth six (6) points. YOU MUST SHOW YOUR WORK IN THE SPACE PROVIDED TO SECURE FULL CREDIT FOR THESE QUESTIONS.
1. Suppose two firms with the same LRAC curve supply goods to one market. For both firms, equili
ium quantity is units per month, and equili
ium price is per unit. Firm A invented a new technology, received a patent for it, and increased its sales by . The increase in demand causes the market price to decrease by .
If Firm B continues to produce units, how will the total revenue for each firm change in a month?
Firm B (without patent): _______________
Firm A (with patent): _______________
2. Consider a market with a monopoly firm. Sales revenue of this firm is , total cost is , and average cost is . Another firm wants to enter the market and provide the same product at a lower price. To intimidate the potential competitor, the monopoly firm intends to use predatory pricing.
By how much can this firm reduce the price of its product without losses?
Answer: _______________ per unit
3. Suppose that a monopolist has a constant marginal cost curve. That is, for each unit of output that the monopolist produces, it costs an additional . The monopolist's marginal revenue is , where Q is the quantity produced. The demand curve is .
What is the monopolist's profit-maximizing output and price? Enter your results in the boxes below and show your work.
Answer: _______________
_______________
4. Consider the following scenario:
Suppose a company creates its own differentiated type of sneaker and is thus considered a monopolistically competitive firm. This firm has a constant marginal cost curve. For each unit of output that the monopolistically competitive firm produces, it costs an additional . The firm's marginal revenue curve is , where is the quantity produced. The firm's perceived demand curve is .
What is the monopolistically competitive firm's profit-maximizing output and price? Show all your work.
Answer: ----------------------------
5. At Point A on the demand curve, a monopolistic competitor sells units of a product at a price of . At Point B, the output increases by units, the price falls by , and the total costs increase by .
Step 1. Calculate the absolute difference between the marginal revenue and the marginal cost for Point B. Enter your answer as a positive number in the box below and round to the nearest cent if necessary.
Answer: _______________
Step 2. Is Point B a profit-maximizing point on the demand curve? Select the best answer.
A) Yes, because at Point B, the marginal revenue is greater than the marginal cost.
B) Yes, because at Point B, the marginal revenue is greater than the marginal cost.
C) No, because at Point B, the marginal revenue is greater than the marginal cost.
D) No, because at Point B, the marginal revenue is greater than the marginal cost.
6. Raj and Mary are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn . If they decide to work together and both lower their output, they can each earn . If one person lowers output and the other does not, the person who lowers output will earn and the other person will earn .
The table below represents the choices available to Raj and Mary. Each results entry lists Raj's earnings first, and Mary's earnings second.
Mary
Work Independently
Cooperate & Lower Output
Raj
Work Independently
(, )
(, )
Cooperate & Lower Output
(, )
(, )
Step 1. What is the best choice for Raj if he is sure that Mary will cooperate? Select the best answer.
A) Work independently
B) Cooperate and lower output
Step 2. If Mary thinks Raj will cheat and work independently, what should Mary do? Select the best answer.
A) Cooperate and lower output
B) Work independently
Step 3. What is the prisoner's dilemma result? Select the best answer.
A) Raj will cooperate and lower output, and Mary will work independently.
B) Both Raj and Mary will cooperate and lower output.
C) Both Raj and Mary will work independently.
D) Raj will work independently, and Mary will cooperate and lower output.
Step 4. What is the prefe
ed choice if they could ensure cooperation? Select the best answer.
A) Both Raj and Mary will cooperate and lower output.
B) Both Raj and Mary will work independently.
C) Raj will work independently, and Mary will cooperate and lower output.
D) Raj will cooperate and lower output, and Mary will work independently.
7. Consider a hypothetical world with two countries: Country A and Country B. Per hour, Country A can produce units of Product 1 or units of Product 2, while Country B can produce units of Product 1 or units of Product 2. Each country has worker hours. Assume that, initially, each country devotes of its available time to each product.
Calculate the increase in total world production of Product 1 if each country starts specializing in its comparative advantage. Enter your answer in the box below.
Answer: _______________ units
8. Suppose that there are only two countries: Albania and Bahrain. Each country has the same number of workers, and each country can devote resources to producing coats and sweaters. The table below shows the maximum amount of each good that each country can produce if it devotes all of its resources to the production of that good.
Coats
Sweaters
Albania
Bahrain
Step 1. Calculate the opportunity cost of producing coats in Albania. Enter your answer as a decimal number in the box below, and round to two decimal places if necessary.
Answer: _______________
Step 2. Calculate the opportunity cost of producing coats in Bahrain. Enter your answer as a decimal number in the box below, and round to two decimal places if necessary.
Answer: _______________
9. Consider a hypothetical world with two countries: Country A and Country B. There are workers in each country. Before trade, Country A produced chairs and tables, while Country B produced chairs and tables. Additionally, workers were equally divided between the two goods. After trade, both countries shift their labor toward their areas of comparative advantage. Country A shifted workers from chairs to tables, and Country B shifted workers from tables to chairs.
Calculate total production of tables in both countries after trade. Assume that worker productivity is constant. Enter your answer in the box below.
Answer: _______________ tables
10. Consider a hypothetical world with two countries: Country A and Country B. Labor is the only resource available in both countries. In Country A, it takes workers to produce laptops and workers to produce bags. In Country B, it takes workers to produce laptops and workers to produce bags. Assume that consumers and producers cannot differentiate between laptops or bags from either country. The production before trade is shown in the table below.
Country
Number of Laptops (in thousands)
Number of Bags (in thousands)
Country A
Country B
Although Country A has an absolute advantage in laptops and bags, it has a comparative advantage in producing laptops. That is why Country A decides to increase the production of laptops by shifting workers from the production of bags and exporting the additional output of laptops to Country B. In turn, Country B has a comparative advantage in producing bags and should increase production of bags by shifting workers from the production of laptops.
Calculate the change in the total world production of laptops and bags. Enter your answers in thousands in the boxes below and round to the nearest whole number if necessary. Use a minus sign to show a decrease in total world production.
Answer: Change in laptops: _______________ thousand
Change in bags: _______________ thousand
11. Consider Tables A and B below. Table A shows the number of workers needed to produce bushels of tea and bushels of rice in China and India. The second column of Table B shows the total production of tea if each country had workers producing tea only. The third column of Table B shows the total production of rice if each country had workers producing rice only.
Assume that initially, all workers in India produce only tea. India transfers workers from tea production to production of the other good.
Country
Bushels of Tea
Bushels of Rice
China
India
Country
Tea Production Using Workers
Rice Production Using Workers
China
India
How much tea would India produce (in bushels)? Enter your answer in the box below.
Answer: _______________
12. Consider a hypothetical world with two countries: Country A and Country B. Both countries produce computers and televisions. Assume that consumers in both countries desire both these goods and that consumers and producers cannot differentiate between computers and televisions from either country. The production in each country before trade is shown in the table below.
Production before Trade
Country
Computer Production
Television Production
Country A
Country B
Total
Suppose that each country transfers some amount of resources toward its area of comparative advantage. The production in each country after the countries started trade is as follows:
Production after Trade
Country
Computer Production
Television Production
Country A
Country B
Total
Determine the range for the quantity of televisions exchanged for computers that will benefit both countries. Note that a country will benefit from trade if it can consume more than in a world without trade. Enter your answers in the boxes below.
Answer: Greater than _______________ televisions
Lower than _______________ televisions
13. Consider the following tables. Table 1 gives the cu
ent production by two countries before specialization and trade. Both countries then transfer resources to produce more of the good in which they have a comparative advantage. This new level of production, after specialization, is given in Table 2.
Scarves
T-Shirts
Vietnam
India
Table 1
Scarves
T-Shirts
Vietnam
India
Table 2
Step 1. What product India will export? Show how India will benefit from free trade
Step 2. What product Vietnam has a comparative advantage in. Show how Vietnam will benefit from free trade.