Assignment 3
DEPARTMENT OF ECONOMICS
Economics 340H – FA 07 OSH Assignment #3
Instructor: Christopher Michael Due Date: Dec 6, 2007 Question 1 – Perfect Competition and Monopolistic Competition
Superior Metals Company has seen its sales volume DECLINE over the last few years as the result of rising foreign imports. In order to INCREASE sales (and hopefully, profits), the firm is considering a price reduction on luranium, a metal that it produces and sells. The firm currently sells 60,000 kilos of luranium a year at an average price of $10 per kilo. Fixed costs of producing luranium are $250,000. Current variable costs per kilo are $5. The firm has determined that the variable cost per kilo could be reduced by $0.50 if production volume could be increased by 10 percent (fixed costs would remain constant). The firm's marketing department has estimated the arc elasticity of demand for luranium to be - 1.5.
(a) How much would Superior Metals have to reduce the price of luranium in order to achieve a 10 percent increase in the quantity sold?
(b) What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and after the price cut?
Question 2 – Monopoly
Zar Island Gas (ZIG) Company is the sole producer of natural gas in the remote island country of Zar. The firm's operations are regulated by the local Energy Commission. The demand function for gas in Zar has been estimated as: P = 1,000-0.2Q where Q is output (measured in units) and P is price (measured in dollars per unit). ZIG’s cost function is:
TC = 300,000 + 10Q
This total cost function does NOT include a "normal" return on the firm's invested capital of $4 million.
(a) In the absence of any government price regulation, determine ZIG's optimal (i) output level, (ii) selling price, (iii) total profits, and (iv) rate of return on its asset base.
(b) The Energy Commission has ordered the firm to charge a price which will provide it
Economics 340H – FA 07 OSH Assignment #3
Instructor: Christopher Michael Due Date: Dec 6, 2007 Question 1 – Perfect Competition and Monopolistic Competition
Superior Metals Company has seen its sales volume DECLINE over the last few years as the result of rising foreign imports. In order to INCREASE sales (and hopefully, profits), the firm is considering a price reduction on luranium, a metal that it produces and sells. The firm currently sells 60,000 kilos of luranium a year at an average price of $10 per kilo. Fixed costs of producing luranium are $250,000. Current variable costs per kilo are $5. The firm has determined that the variable cost per kilo could be reduced by $0.50 if production volume could be increased by 10 percent (fixed costs would remain constant). The firm's marketing department has estimated the arc elasticity of demand for luranium to be - 1.5.
(a) How much would Superior Metals have to reduce the price of luranium in order to achieve a 10 percent increase in the quantity sold?
(b) What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and after the price cut?
Question 2 – Monopoly
Zar Island Gas (ZIG) Company is the sole producer of natural gas in the remote island country of Zar. The firm's operations are regulated by the local Energy Commission. The demand function for gas in Zar has been estimated as: P = 1,000-0.2Q where Q is output (measured in units) and P is price (measured in dollars per unit). ZIG’s cost function is:
TC = 300,000 + 10Q
This total cost function does NOT include a "normal" return on the firm's invested capital of $4 million.
(a) In the absence of any government price regulation, determine ZIG's optimal (i) output level, (ii) selling price, (iii) total profits, and (iv) rate of return on its asset base.
(b) The Energy Commission has ordered the firm to charge a price which will provide it