Economics 370 Microeconomic Theory Problem Set 6 Answer Key
1) Describe the effects on output and welfare if the government regulates a monopoly so that it may not charge a price above p, which lies between the unregulated monopoly price and the optimally regulate price (determined by the intersection of the firm’s marginal cost and the market demand curve).

As usual, the monopoly determines its optimal output on the basis of MR = MC. Here, however, it cannot charge a price in excess of p*. So, for any output less than Q(p*) (where Q(p) is the demand function) its marginal revenue is p*. On the graph below that gives:

pm p* MR

MC

Demand q
m

q

*

2) The inverse demand curve a monopoly faces is p=10Q-1/2. The firm’s cost curve is c(Q) = 10 + 5Q. Find the profit maximizing price and quantity, and economic profit for the monopoly.

Revenue = pQ = Q(10Q-1/2) = 10Q1/2 MR = 5Q-1/2 MC = 5 Profit maximization implies MR = MC, so 5Q-1/2 = 5, or Q* = 1; p* = 10. Economic Profit = Revenue – Cost = Q × p – c(Q) = 1(10) – (10 + 5Q) Economic Profit = 10 – 15 = -5. So, the monopoly will not produce at all, and will have a profit of zero. 3) The inverse demand curve a monopoly faces is p = 100 – Q. Find the profit maximizing price and quantity, and economic profit if: a) The total cost curve is c(Q) = 10 + 5Q.

p = 100 – Q, R = p × Q = (100 – Q) × Q, so MR = 100 – 2Q. C(Q) = 10 + 5Q, therefore MC = 5. The profit-maximizing rule is MR = MC. 100 – 2Q = 5 ⇒ Q* = 47.5, p* = 100 – Q* = 52.5

So the profit-maximizing quantity is 47.5 units. The firm will charge $52.5 per unit. Economic Profit = Revenue – Cost = Q × p – c(Q) = Q(100 – Q) – (10 + 5Q) Economic Profit = 47.5(52.5) – (10 + 5(47.5)) = $2,246.25 b) The total cost curve is c(Q) = 100 + 5Q. How is this similar/different from that found in part a?

The optimal price and quantity are the same, because the marginal cost doesn’t change. The marginal cost is constant at $5 as before. By setting MR =...

... Microeconomics (Fall 2014)
Simon Bowmaker
ProblemSet 6
Submit at lecture (Monday, November 10)
Write your answers on separate sheets of paper. Please include:
your name
your recitation teacher’s name
day and time of the recitation
NB: if your recitation takes place on Monday morning, you must submit your assignment to your teacher at the beginning of the recitation.
1. Assume a monopolist faces the following market demand: Q = 100 - 2P. The monopolist’s total cost function is TC = 5+8Q2. What is the monopolist’s profit-maximizing level of output and price?
Answer
Step 1. Derive the MR and MC functions.
Since Q = 100 - 2P, P = 50 – (Q/2)
TR=P*Q=(50-1/2Q)Q=50Q-1/2Q2
MR=dTR/dQ=50-Q
MC=dTC/dQ=16Q
Step 2. Set MR=MC and solve for P*, Q*
MR=MC
50-Q=16Q
Q*=2.94 or 3 (rounded)
P*=50-1/2Q*=50-1/2*3=48.5
2. Assume a monopolist faces a market demand curve P = 130 – 2Q, and has the short-run total cost function TC = 350 + 10Q.
(a) What is the profit-maximizing level of output and price? What are profits?
(b) Graph the marginal revenue, marginal cost, and demand curves.
(a) Step 1. Derive the MR and MC functions.
P 130 – 2Q
TR=P*Q=(130 – 2Q)Q=130Q – 2Q2
MR=dTR/dQ=130 – 4Q
MC= dTC/dQ=10
Step 2. Set MR=MC and solve for P*, Q*, and π.
MR=MC
130 – 4Q=10
4Q=120
Q*=30
P*=130 – 2Q=130 – 2*30=130-60=70
Π=TR-TC=P*Q-TC=70*30-(350 10*30)=2100-650=1450
(b)...

...FBE 421 Prof. Briggs ProblemSet #1
Please print out this document and clearly handwrite your answers to each of the questions below in the space provided. Show all your work accordingly.
A. Calculate LTM (a) Revenue and (b) Net Income for Costco Wholesale (COST) using their latest financial statements as of 3Q2011.
77946+60737-53821=84,862 MM Revenue 1303+984-871= 1,416 MM Net-income
B. Calculate Costco’s LTM (a) EBIT and (b) EBITDA.
2077+1677-1389=2,365 MM EBIT (2077+795)+(1677+582)-(1389+549)= 3192 MM EBITDA
Name: Student ID:
￼1.
￼C. Calculate Costco’s (a) Market Cap, (b) Total Debt and (c) Enterprise Value as of 3Q2011.
a) 437,735,000 * 85.07 = 37.238 Bn
b) 1+900+1,247=2.148 Bn
c) 37.238+2.148+.578 (minority interest)-4.082= 35.882 Bn (35,882 MM)
D. Calculate Costco’s (a) EV/Revenue and (b) EV/EBIT multiples.
a) 35,882/84,862=.42x b) 35,882/2,365=15.17x
2. Explain the differences between a firm’s (a) market value, (b) enterprise value, and (c) book value.
a) Market value, otherwise known as market capitalization, is the current value of the firm’s common equity on the open market. This is the value necessary to buy the entire firm’s equity.
b) Enterprise value is the value of all the claims on the firm’s capital structure less cash. This includes the value of equity, preferred stock, debt, and minority interest less cash. This is the value necessary to purchase the entire firm.
c) Book value is the value of a...

...University of Hong Kong
1st semester 2014-15
ECON0301/ECON2252 Theory of International Trade
ProblemSet 1
Due time: 5pm September 26, 2014 (Friday)
Answer all of the following questions. While I encourage you to discuss
with your classmates, you have to write up your own script. Please hand it
in to your TA (Miss Jiuqi Zhao) by the due time via her pageon box on
the 9th ‡oor of K.K. Leung Building.
1. Suppose that Home and Foreign have the marginal product of labor
shown below.
Home
Foreign
Baseball bats
1/6
1
tennis rackets
1/2
1/4
(a) What is the opportunity cost of rackets in terms of bats for the
Home country? for the Foreign country?
(b) In which good does Home have the comparative advantage? why?
(c) At world equilibrium with trade, what do you know about the
relative price of tennis rackets?
(d) Assume that tennis rackets trade for bats on world markets at an
equlilbrium price of PR =PB = 2. Why will each country specialize? at what good?
(e) Demonstrate there will be gains from trade reaped by the foreign
country when it specializes in bat production.
2. Evaluate the following statements.
(a) Developed countries have nothing to gain by trading with developing countries.
(b) Developed countries get all the gains when the trade with developing countries because they can dictate their prices to this
country.
1
(c) The United States can no longer compete in world markets because American wages are too...

...Selected answerkey for problemset 1 Econ262
C1.2 (i) There are 1,388 observations in the sample. Tabulating the variable cigs shows that 212 women have cigs > 0.
(ii) The average of cigs is about 2.09, but this includes the 1,176 women who did not smoke. Reporting just the average masks the fact that almost 85 percent of the women did not smoke. It makes more sense to say that the “typical” woman does not smoke during pregnancy; indeed, the median number of cigarettes smoked is zero.
(iii) The average of cigs over the women with cigs > 0 is about 13.7. Of course this is much higher than the average over the entire sample because we are excluding 1,176 zeros.
(iv) The average of fatheduc is about 13.2. There are 196 observations with a missing value for fatheduc, and those observations are necessarily excluded in computing the average.
(v) The average and standard deviation of faminc are about 29.027 and 18.739, respectively, but faminc is measured in thousands of dollars. So, in dollars, the average and standard deviation are $29,027 and $18,739.
C1.3 (i) The largest is 100, the smallest is 0.
(ii) 38 out of 1,823, or about 2.1 percent of the sample.
(iii) 17
(iv) The average of math4 is about 71.9 and the average of read4 is about 60.1. So, at least in 2001, the reading test was harder to pass.
(v) The sample correlation...

...FIN532M: Financial Derivatives
ProblemSet 2
DUE DATE: Feb. 12, 2015
1. How can you differentiate the forward price from the value of a forward contract?
(2 points)
2. Explain why an FRA can be viewed as an exchange of a floating rate of interest for a fixed rate of
interest payments and how you can use FRA in mitigating risks.
(4 points)
3. The standard deviation of monthly changes in the spot price of live cattle is 1.2 cents per pound. The
standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.4.
The correlation between the futures price and the spot price changes is 0.7. It is now Feb 5 and a beef
producer is committed to purchase 200,000 pounds of live cattle on April 10. The producer wants to use
the May live-cattle futures contracts to hedge its risk where each contract is for the delivery of 40,000
pounds of live cattle. Answer the following:
a. Indicate the optimal hedge ratio.
(2 points)
b. Indicate if long or short and the optimal number of May contracts to be used.
(2 points)
4. An index is 1,200. The three-month risk-free rate is 3% per annum and the dividend yield over the
next three months is 1.2% per annum. The six-month risk-free rate is 3.5% per annum and the dividend
yield over the next six months is 1% per annum. All interest rates and dividend yields are continuously
compounded. Estimate the futures price of the index for six-month contract.
(3 points)
5....

...Peaches are a normal good for her. Her income increased by 20 percent and prices did not change. Her consumption of strawberries could not have increased by more than 20 percent.
5. Beatrice has the utility function U(x ,y)= min{x ,y}. The price of x used to be 3, but rose to 4. The price of y remained at 1. Her income is 12. The price increase was as bad for her as a loss of $3 in income.
6. Just as in the theory of utility maximizing consumers, the theory of profit maximizing firms allows the possibility of "Giffen factors". These are factors for which a fall in price leads to a fall in demand.
7. If there are increasing returns to scale, then average costs are a decreasing function of output.
8. Since a monopoly makes excess profits beyond the normal rate of return on investment, an investor is likely to get a higher rate of return in the stock market by investing in monopolistic rather than competitive industries.
9. A Stackelberg leader will necessarily make at least as much profit as he would if he acted as a Cournot oligopolist.
10. Dominant strategy equilibrium is a set of choices such that each player's choices are optimal regardless of what the other players choose.
II Fill in the blanks for the following questions:（2points*10）
1) Your budget constraint for the two goods A and B is 12A+ 4B = I where I is your income. You are currently consuming more than 45 units of B. In order to get 5 more units of A, how many...

...Microeconomics Research Paper
1 Introduction
How do businesses grow? Unfortunately, there is no simple answer to this question, mainly since it is evidently clear that offering the best service, the best price or the best promotion is no guarantee for success. Therefore, sound business administration implies that a wide array of internal and external factors must be taken into consideration when we try to open, expand or manage a business entity. One of the possible ways to examine this issue is to use tools and theories from the science of microeconomics, whose main concern is “the economic behavior of part(s) of an economic system” (Rutherford, 2002, p. 382). The microeconomic approach does not give us the complete picture of business performance, but it is surely handy in order to develop a logical and systematic decision-making at the single entity’s level. By that this science differs from other studies of economic behavior, such as macroeconomics, which deals with the economic conduct of groups, societies and markets.
This aim of this paper is twofold. First, it introduces in brief several keymicroeconomic concepts, which are relevant for a sound analysis of business growth opportunities. Second, it applies those concepts into practical context, by demonstrating how a small cleaning business can use microeconomics to develop its market share,...

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