Step-by-step solution

Problem 9-3
1. Step 1 of 9

The companys best level of output is the one where the marginal revenue
cost

equals marginal

of the company.

The profit

of the company is calculated by taking the difference between the total revenue

and total cost

of the company.

Total revenue is the area under the average revenue

the average total cost

curve and total cost is the area under

curve.

2. Step 2 of 9
a) If the price of hair styling is $18, the demand curve or the marginal revenue curve is drawn as
line parallel to quantity axis at

3. Step 3 of 9

curve intersects

curve at

. The best level of output, therefore, is

Profit is calculated as:

Thus, the total profits of the company are

4. Step 4 of 9
b) If the price of hair styling is $13, the demand curve or the marginal revenue curve is drawn as
line parallel to quantity axis at

5. Step 5 of 9

curve intersects

curve at

. The best level of output, therefore, is

Profit is calculated as:

The firm breaks-even at this point. The total profits of the company are

c) If the price of hair styling is $9, the demand curve or the marginal revenue curve is drawn as
line parallel to quantity axis at

6. Step 6 of 9

curve intersects

curve at

. The best level of output, therefore, is

Profit is calculated as:

The firm operates in losses. The total profits of the company are negative at
.
Since average variable cost is still being covered, the company can minimize losses by staying in
business.
7. Step 7 of 9
d) If the price of hair styling is $5, the demand curve or the marginal revenue curve is drawn as
line parallel to quantity axis at

8. Step 8 of 9

curve intersects

curve at

. The best level of output, therefore, is

Profit is calculated as:

The firm operates in losses. The total profits of the company are negative at

e) If the price of hair styling is $3, the demand curve or the marginal revenue curve is drawn as
line parallel to quantity axis at

9. Step 9 of 9

curve intersects

curve at

. The best level of output, therefore, is

At such low price, the firm is not able to cover even its variable costs. The firm incurs a total loss
which includes the total fixed cost of $40,000 and total variable cost $9,000 (which is the
difference between the total revenue and total variable cost). The firm should shut-down and
reduce its total losses at total fixed cost of $40,000 during short-run.

Problem 9-4

1. Step 1 of 3
a) The following schedule gives the best level output supplied at different prices for the Unisex
Hair Styling Corporation.
P(in $)
18
13
9
5

Q
7,000
6,000
5,000
4,000

Since factor prices remain unchanged with increase in output, the output for the entire market of
100 identical firms will be 100 times the output of the individual firm.
The diagram below shows the supply curve for the individual firm Unisex Hair Styling Corporation
in panel (a) and the entire market of 100 identical firms in panel (b).

The individual supply curve is represented by

.

and the market supply curve is represented by

2. Step 2 of 3
b) Under perfect competition, the portion of the marginal cost curve above the minimum point of
the average cost is the supply curve of the firm. That is, above the shut-down point
, the
firm will supply output. An increase in price increases the quantity supplied, depicting a positive
relationship between the both.
The market comprises of 100 identical firms. Also, factor prices remain unchanged for any
increase in the output. Thus, the output for the entire market is 100 times the output of the
individual firm.
3. Step 3 of 3

c) At

, the quantity of service supplied by the firm is

of service supplied by the industry is

At

, the quantity of service supplied by the firm is

of service supplied by the industry is

At

and the quantity

, the quantity of service supplied by the firm is

service supplied by the industry is

and the quantity

and the quantity of

Problem 9-5
Step-by-step solution
1. Step 1 of 3

a) In the short-run, the best level of output

for the firm is the one where the price of the hard

disk equates the short-run marginal cost of producing it, that is, at

. In the figure, the

2. Step 2 of 3
At the best level of output, average total cost per unit is $12 and the price per unit is $16. The
profit per unit is the difference between the price per unit and average total cost per unit. That is,
.

The total profit

is:

Hence, the total profit earned by the firm is

3. Step 3 of 3
b) The firm will operate at a scale of production shown by SAC3. The equilibrium will be attained
when the price of the product equates both, SMC3 and long-run marginal cost
when

. That is,

. At equilibrium, the best level of output is 800 units.

At the best level of output, average total cost per unit is $11 and the price per unit is $16. The
profit per unit is the difference between the price per unit and average total cost per unit. That is,
.

The total profit

is:

Hence, the total profit earned by the firm is

However, since the firm is operation in near perfectly competitive market, assumption of only one
firm adjusting to the long-run is unrealistic.

Problem 9-6
1. Step 1 of 4
Consider the graph given below showing the per-unit cost curves of Computer Parts Corporation
in the short-run and the long-run.

2. Step 2 of 4
a) In the long-run under perfect competition, new firms enter the market lured by the excess
profits in the short-run. As a result, the total output in the market increases pushing the price
downward such that price becomes tangent to the minimum of long-run average cost
the end each firm in the long-run tends to earn only normal profit.

. In

The long-run profit maximizing condition could be summarized as follows:

.
3. Step 3 of 4
In the given diagram above, it can be seen that lured by the excess profit in the short-run (shown
by the rectangle

) the entry of new firms pushes the price downward from

from

. At the new price of $8,

.

It can be further noted that at this equilibrium price of $8, each firm is producing an output of 500
units (assuming that all the firms in the market have same cost curves) and earning only normal
profits. Moreover, all the firms in the market break-even as they are operating at the lowest point
of

curve.

4. Step 4 of 4
b) The implicit assumption made in the above given solution is that input prices does not change
due to increase in demand for inputs by the new entrants. If the prices of input also tend to vary
with increase in the demand of the inputs then the cost curve for all the firms will push upward
with the result that industry under the perfect competition will no longer be in long-run equilibrium.
That is the long-run equilibrium condition

will not be met.

Chapter 9, Problem 7P
1. Step 1 of 2
A 33 percent tariff on the import of commodity
The price of commodity
would be:

will increase the free trade price by 33 percent.

before imposition of tariff was $3. The price (P) after import tariff

Imposition of tariff increases the price of imports approximately by $1. The graph below shows
the impact of import tariff.

2. Step 2 of 2
At increased price, the domestic demand for imported commodity declines from 600 units to 500
units as increase in price induces buyers to demand less. On the other hand, suppliers increase
their supply from 200 units to 300 units as response to increase in price. The difference between
the quantity demanded and supply declines from 400 units
. The imports are now

to 200 units

Chapter 9, Problem 8P
1. Step 1 of 2
a) The company is facing the risk arising from the continuous fluctuations in the foreign
exchange. Since the company is an importer, therefore, the company in actual is facing risk on
account of depreciation of dollar in relation to euro. If there is depreciation of dollar in relation to
euro, then it will become costlier for the company to import food from Europe. As a result there
are dangers that fall in the value of dollars with respect to euro might eliminate the companys
profits and company may even suffer losses.
2. Step 2 of 2
b) The company can cover the risk by holding more euros in the bank so that it can pay extra
euros (which it might have to pay on account of dollar depreciation) at the time of imports.
Another efficient way is to purchase the euros at forward rate at the time it places the import
orders but company can pay for the euros at the agreed exchange rate at the specified future
date.

Chapter 9, Problem 9P
Step-by-step solution
1. Step 1 of 3
The graph below shows the impact of increase in average fixed cost on the average total cost
. The
remains the same.

curve shifts upwards to

by $6 such that the best level of output

is the average variable cost of the monopolist.

The average total cost per unit now is $13 and the price per unit is $11. Profit per unit can be
calculated by taking the difference between the price per unit and cost per unit. Cost per unit
exceeds the price per unit. The

2. Step 2 of 3
The best level of output, where marginal cost equals marginal revenue is 500. To calculate profit
, find the difference between the total revenue and total cost.
Total revenue is price per unit times best level of output and total cost is cost per unit times best
level of output. That is,

The profits are negative. Hence, the monopolist is incurring

3. Step 3 of 3
The monopolist should continue producing as long as the variable costs are being covered.

Chapter 9, Problem 10P

1. Step 1 of 2

a) The figure below shows the increase in the long-run average costs
monopolist breaks even. The
demand curve at

curve shifts up to

such that the

until the curve is tangent to the

2. Step 2 of 2
b) The monopolist would produce at the lowest point on its
revenue

curve intersects the marginal cost

The figure below shows the shift in the

be shifted accordingly from

to

curve from

curve only when the marginal

curve at the minimum of

to

curve.

. The demand curve would

Chapter 9, Problem 12P

Step-by-step solution
1. Step 1 of 2
a) The demand function for haircuts per day at Unisex International Haircutters, Inc., is:

Where;

is the number of haircuts per day

is the price of each haircut, in dollars

Total revenue
is the total receipts of the production firm obtained by sales of a given
quantity of output. It is calculated as:

Marginal revenue (MR) measures the increase in the total revenue by selling an additional unit of
commodity. It is calculated as:

The schedule below shows the quantity demanded, total revenue, and marginal revenue of
haircuts at Unisex International Haircutters, Inc.

Quantity Demanded Total Revenue

Marginal Revenue

Price in dollars

220

400

540

640

700

720

700

640

540

10

400

11

220

12

The following diagram shows the demand curve

Unisex International Haircutters, Inc.

and the marginal revenue curve

for

b) The best level of output of 80 haircuts per day, the price per unit is $8 and the average total
cost is $10 per unit.
The profit per unit is the difference between the price per unit and average total cost per unit.
That is,

. This implies that the firm is incurring a

Chapter 9, Problem 13P

Step-by-step solution
1. Step 1 of 7
a) Consider the figure given below

Comment
2. Step 2 of 7

In the figure,

-axis measures price

, marginal cost

, marginal revenue

and

average cost
and -axis measures the level of output
. It can be seen from the figure
that, in the long-run, with the entry of the new firms in the market the demand curve for the firm
shifts downward due to fall in the share of the firm in the total market demand. As a result the new
demand curve is
from

to

which is parallel to the demand curve

. the shift in the demand curve

is such that in the long-run it becomes tangent at point

portion of the long-run average cost

corresponds to the equality between
corresponding to point

which is on the declining

curve. The new equilibrium shown by point

and

(point

). The output level

is 60 units and the price determined is $6 per unit.

In the long-run equilibrium under monopolistic competition, the firm is earning only the normal
profit because

3. Step 3 of 7
If instead of monopolistic competition it is assumed that there is perfect competition, then in the
long-run, equilibrium will take place at that output level where

(point

). It can be seen from the figure that

occurs at the output level,

. At this output level the price is

4. Step 4 of 7
b) The excess capacity is a necessary evil under the monopolistic competition. This excess
capacity is due to the presence of monopoly element arising on account of product differentiation.
The excess capacity can be determined by the difference between the best level of output under
the perfect competition and the best level of output under the monopolistic competition.
It can be seen from the figure that the difference between the output level corresponding to point
and output level corresponding to point

is 30 units. That is,

.
5. Step 5 of 7
Due to excess capacity under the monopolistic competition, there exists more number of firms
than it is needed in the long-run if there would have been perfect competition.
6. Step 6 of 7
c) According to the figure given above, the long-run equilibrium under monopolistic competition is
less efficient than the long-run equilibrium under perfect competition.
It can be seen from the figure that the long-run equilibrium under monopolistic competition occurs
at point

where the firm is operating at the declining portion of

(point

such that

).

Under the perfect competition, in the long-run, equilibrium will take place at that output level
where

(point

) It can be seen from the figure that

occurs at the output level,

which is greater than

under monopolistic competition. At this output level the price is

less than

which is

under monopolistic competition.

7. Step 7 of 7
However, the overcharged price for less output under the monopolistic competition is the cost for
providing the consumers with differentiated product in terms of design, quality, and so on. In real
world, a consumer would be better to pay an extra dollar for variety than to get satisfied with a
lower price for a single product as under perfect competition.

Chapter 9, Problem 14P

1. Step 1 of 3
a) In a monopolistically competitive movie market, the demand function for daily attendance at
Plaza Movie House is:
(1)
The long-run average cost function for daily attendance at Plaza Movie House is:
(2)
For a monopolistically competitive movie market,

Substitute the value of

in the long-run. That is,

in (1).

Hence, the price charge by the Plaza Movie House for admissions to movies in the long-run is
and the number of patrons at this price is

2. Step 2 of 3
b) Substitute the value of

in (2) to find the long-run average cost incurred by the firm.

The value of long-run average cost that the firm incurs is

3. Step 3 of 3
c) Since
run.

, Plaza Movie House does not earn any profit. It breaks even in the long

Chapter 9, Problem 15P

Step-by-step solution
1. Step 1 of 8
There are hundred identical self-service-based gasoline stations vending the same type of
gasoline.

The overall daily market demand

are

and market supply

functions for gasoline market

(1)
(2)
Here,

is the price per gallon of gasoline in dollars.

2. Step 2 of 8
a) The equilibrium in the market is attained by equating the market demand with market supply.

Substitute

in (1):

Thus, the equilibrium price of gasoline is

gasoline is

and the equilibrium quantity of

3. Step 3 of 8

b) The diagram below shows the market demand

gasoline in panel (a) and the demand
in the market in panel (b).

and market supply

and supply

curves for

curve for an individual firm

Point E represents the equilibrium in the gasoline market, while e represents equilibrium for the
individual firm.

The total daily market supply

of gasoline is
identical firms, supply for individual gasoline station will be

for

. Given 100

The demand curve for a single firm is horizontal and parallel to the quantity axis depicting that the
firm can sell any quantity of gasoline for equilibrium price

4. Step 4 of 8
c) The figure in panel (a) depicting market and the one in panel (b) depicting an individual firm are
consistent because of the existence of 100 identical gasoline stations forms nearly perfect
competitive market for gasoline.

5. Step 5 of 8

d) The total daily market demand

for gasoline is

or

Total revenue

is calculated by taking the product of price and output.

Derivate the total revenue function with respect to output to derive marginal revenue
function.

The diagram below shows the monopolized market.

The single monopolist firm faces the demand curve

corresponding to it.

and a marginal revenue curve

The market supply curve becomes the marginal cost curve,

, for the monopolist firm.

A monopolist maximizes profit at the point where marginal revenue of the firm is equal to its
marginal cost.

Equilibrium is given by point

. The equilibrium price of gasoline is

the equilibrium quantity of gasoline is

and

6. Step 6 of 8
e) The monopoly is formed by merging all 100 gasoline stations. It will operate in all the stations
existing in the market.
7. Step 7 of 8
f) The consumer surplus under perfect competition and under monopoly is shown in the figure
below.

Given below is the perfect competition. The consumer surplus is represented by area
That is,

The consumer surplus under perfect competition is area

. That is,

8. Step 8 of 8
Consumer surplus under perfect competition is greater than consumer surplus under monopoly.

Also, the monopoly firm produces less and charges more than the firm under perfect competition.

Therefore,

The deadweight loss

is the loss of economic efficiency.

The amount of deadweight loss under monopoly is