Eco 550 Check Your Understanding Week 5 (Answers)

Topics: Marginal cost, Variable cost, Costs Pages: 3 (681 words) Published: May 27, 2013
Check Your Understanding Week 5 (ANSWERS)

o Chapter 9: Problems 3, 4, and 5

3. Electrical generation study of 56 British firms:
a. VC = AVC(Q)
VC = 1.24Q + .0033Q2 + .0000029Q3 − .000046Q2Z − .026QZ + .00018QZ2
b. MC = 1.24 + .0066Q + .0000087Q2 − .000092QZ − .026Z + .00018Z2
c. Z = 150(thousand) kilowatts
SRAVC = 1.24 + .0033Q + .0000029Q2 − .000046Q(150) − .026(150) + .00018(150)2
SRAVC = 1.39 − .0036Q + .0000029Q2
SRMC = 1.24 + .0066Q + .0000087Q2 − .000092Q(150) − .026(150) + .00018(150)2
SRMC = 1.39 − .0072Q + .0000087Q2
d. d(SRAVC)/dQ = 0 (condition for minimum SRAVC) = −.0036 + .0000058Q = 0
Q* = 620.7 (million) kilowatt-hours/year
e. SRAVC = 1.39 − .0036(620.7) + .0000029(620.7)2 = .27 pence
SRMC = 1.39 − .0072(620.7) + .0000087(620.7)2 = .27 pence
The two are equal, as the MC slices up through the lowest point in the AVC curve.

4. Breakeven analysis:
a. A decrease in P leads to an increase in the breakeven point. b. An increase in V leads to an increase in the breakeven point. c. An increase in F leads to an increase in the breakeven point.

5.Cool-Aire Corporation and the probability of incurring a loss using z-values: a. P(Q < 33,000) = P[ z < {(33,000 − 40,000)/4,000}] = P( z < -1.75) = .03920, or about a 4% chance of a loss. b. P(Q ≥ 33,000) = 1 − P(Q < 33,000) = 1 − .03920 = 0.9608, or about a 96% chance of breakeven or better.

o Chapter 10: Problems 2, 6, and 10
2. MTV operates in a highly concentrated near-monopoly market where fixed costs are low and hence intensity of rivalry is reduced. MTV also faces little supplier power from numerous non-unique musical groups. Even “competitor” music channels such as CMT (Country Music Television) are wholly-owned by MTV. The networks, in contrast, face the much greater supplier power of the NFL, NBA and Professional Baseball. MTV has few substitutes whereas the networks now face 150 channels of...
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