# Langara Microeconomics 1150 Assignment #4

Langara Microeconomics 1150 Fall 2020

Assignment #4 Due Oct. 18

Name ________________________              Student Number ____________

1. In 2016, Toni taught music and earned \$20,000. She also earned \$4,000 by renting out her basement. On January 1, 2017, she quit teaching, stopped renting out her basement, and began to use it as the office for her new Web site design business. She took \$2,000 from her savings account to buy a computer.

During 2017, she paid \$1,500 for the lease of a Web server and \$1,750 for high-speed Internet service. Her total revenue from Web site designing of \$45,000 and she earned interest at 5 percent a year on her savings account balance. Normal profit is \$55,000 a year. At the end of 2017, Toni could have sold her computer for \$500. Calculate Toni’s opportunity cost of production and her economic profit in 2017.

The above figure shows the cost curves of a profit-maximizing perfectly competitive firm. If the price equals \$7,

1. a) how much will the firm produce?
2. b) how much is the firm’s average total, average variable, and marginal costs?
3. c) how much is the firm’s total, total variable, and total fixed costs?
4. d) how much is the firm’s total revenue and economic profit?
5. e) what will happen in this market in the long run?

Use the table to work Problems 3 to 5.

Minnie’s Mineral Springs is a single-price monopoly. Columns 1 and 2 of the table set out the market demand schedule for Minnie’s water and columns 2 and 3 set out Minnie’s total cost schedule.

1. Calculate Minnie’s marginal revenue schedule and draw a graph of the market demand curve and Minnie’s marginal revenue curve. Explain why Minnie’s marginal revenue is less than the price.

 Price (dollars per bottle) Quantity demanded (bottles per hour) Total revenue (dollars) Marginal revenue (dollars per bottle) 10 0 0 8 8 1 8 4 6 2 12 0 4 3 12 −4 2 4 8 −8 0 5 0

.

 Price (dollars per bottle) Quantity demanded (bottles per hour) Total cost (dollars per hour) 10 0 1 8 1 3 6 2 7 4 3 13 2 4 21 0 5 31

1. At what price is Minnie’s total revenue maximized and over what range of prices is the demand for water elastic? Why will Minnie not produce a quantity at which the market demand is inelastic?

1. Calculate Minnie’s profit-maximizing output and price and economic profit.

6.

1. Bob and Tom are two criminals who have been arrested for burglary. The police put Tom and Bob in separate cells. They offer to let Bob go free if he confesses to the crime and testifies against Tom. Bob also is told that he will serve a 15-year sentence if he remains silent while Tom confesses. If Bob confesses and Tom also confesses, they will each serve a 10-year sentence. Separately, the police make the same offer to Tom. Assume that Bob and Tom know that if they both remain silent, the police only enough evidence to convict them of a lesser crime, and they will both serve 3-year sentences. (8 marks)
2. Use the information provided to write a payoff matrix for Bob and Tom.
3. Does Bob have a dominant (best) strategy? If so, what is it?
4. Does Tom have a dominant (best) strategy? If so, what is it?
5. What sentence do Bob and Tom serve? How might they have avoided this outcome?