A.

Tabassum Assignment 2 ECON 1006 T

ASSIGNMENT # 2
Microeconomics-Summer 2024
School of Business and Economics-Algoma University
Total Marks = 100
Weight of the assignment in the course= 10%
Due Date: July 17

INSTRUCTIONS
Download this assignment document and complete the answers on the same document, save it by
Group # and Assignment #. Make sure that questions including marks of each part are included
on the assignment. Ensure that you complete all parts of all questions and follow the organization
suggested by each question clearly marking the question number and the parts. Please note that I
will deduct marks for assignment with no cover page, not organized in proper order of questions.
If your assignment is found to be copied from any source, you will get a grade of zero and if it is
copied from another group, both groups will receive a grade of zero.

QUESTION 1 – [20 marks @ 4 each part] Chapter 9 & 10

Market for apple pies in the city of Ectenia is competitive and has the following demand
schedule:
Price Quantity demanded
$1 1200 pies
2 1100
3 1000
4 900
5 800
6 700
7 600
8 500
9 400
10 300
11 200
12 100
13 0
Each producer in the market has fixed cost of $9 and the following marginal cost:

Quantity Marginal Cost

1 $2
2 4
3 6
4 8
5 10
6 12

a. Make a table that includes Output, Fixed Cost, Variable Cost, Total Cost, Average Total Cost
and Marginal Cost for 1 to 6 pies for each producer. Clearly explain how you have calculated

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each column. (Note: Variable cost is not given and neither is the total cost, however,
marginal cost is given that can be used to find the variable cost [cumulative addition of MC
can give you AVC]; make sure to verify the marginal cost from your total cost.)

b. If the price of a pie is $8, how many pies will be sold? How many pies each producer will
make? How many producers are there? How much profit each producer earn? Show all your
work and explain how you found each of the values.

c. Is the situation described in (b) a long-run equilibrium? Why or why not? Explain all the
conditions for a long run equilibrium and state whether each has met or not in this case.

d. Suppose in the long-run, there is a free entry and exit. How much profit does each producer
earn in the long-run equilibrium?

e. What is the market price and number of pies each producer makes? How many pies are sold?
How many producers are operating? Show all your work and explain how you find out the
long-run price, quantity and the number of firms.

QUESTION 2 – [20 marks] Chapter 10

Assume that the market for fertilizer is perfectly competitive. Firms in the market are producing
output but they are experiencing economic losses. [Hint: It is possible in the short run that firms
continue producing despite losses]

a. [4 marks] Explain how ATC, AVC and MC are related (Note: the relationship of these cost
curves is same whether there is loss or profit).

b. [4 marks] Explain how the price of fertilizer compares to the ATC, AVC and MC of
producing fertilizer. [You have to compare price with ATC, AVC and MC for a firm that is
described in the question (one that is making losses but still producing)]

c. [6 marks] Draw two graphs side by side (one for the firm and the other for the entire market)
illustrating the present situation (the short run equilibrium). Carefully label the diagrams and
explain what you draw for both diagrams and carefully explain the conditions under which
the firm is operating despite making economic losses. [In this part, only show the short-run
equilibrium for both the firm and the market. [Note: If you draw short and long run
together on one diagram for this part, you will get a zero grade for both c) and d) parts.
Make sure to follow the instructions.]

d. [6 marks] Assuming there is no change in demand curve or in cost curves, explain what
should happen in the long run to the price of fertilizer, marginal cost, average total cost,
the quantity supplied by each firm, and the total quantity supplied to the market.
Redraw the set of diagrams you drew in part c) and show the long-run equilibrium for the
firm and the market. Each change on the diagrams should be explained step by step to qualify
for full marks. [In this part, you will show both short run and long run, but no marks
without step-by-step explanation.]

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QUESTION 3 – [20 marks] Chapter 11 – Monopolistic Competition

Maria manages a bakery that specializes in ciabatta bread. The following table shows her
bakery’s demand schedule and total costs.

Ciabatta Price Total Cost Average Marginal Marginal

Bread sold (P) (TC) Total Cost Revenue Cost
per hour (ATC) (MR) (MC)
(Q)
0 $6.00 $3.00
1 5.50 7.00
2 5.00 10.00
3 4.50 12.50
4 4.00 14.50
5 3.50 16.00
6 3.00 17.00
7 2.50 18.50
8 2.00 21.00

a. [6 marks] Complete the table.

b. [7 marks] To maximize profit, how many loaves of bread should Maria sell per hour?
What price should she charge? And how much profit will she make? Show all your work
and clearly show the answers for each of the three parts of question.

c. [7 marks] What is the marginal revenue Maria receives by selling the profit maximizing
quantity of bread? What is the marginal cost of producing the profit maximizing quantity
of bread?

QUESTION 4 – [20 marks @ 5 marks each part] Chapter 12 (Oligopoly)

A large share of world supply of diamonds comes from Russia and South Africa. Suppose MC=
1000 per diamond (one million per 1000 diamonds) is constant and demand is given as follows:
P Q TR MR MC
(Thousands) (Thousands) (Millions) (Millions) (Millions)
8 5
7 6
6 7
5 8
4 9
3 10
2 11
1 12
a. Fill in the above table. If there were many suppliers (perfect competition), what would be P
and Q?

b. If there is only one supplier (Monopoly), what would be the price and quantity?

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c. If Russian and South Africa formed a cartel and they agree to split the market evenly, what
would be P and Q? What is the profit of each country?
d. If South Africa decides to produce 1000 more diamonds than it agreed upon, what would be
South Africa’s profit if Russia is stuck with the cartel agreement?

QUESTION 5 – [20 marks @ 5 marks each part] Chapter 13 (Monopoly)

Only one firm (monopoly) produces and sells soccer balls in the country of Wiknam, and as the
story begins, international trade in soccer balls is prohibited. The following equations describe
the monopolist’s demand, marginal revenue, total cost, and marginal cost:

Demand: P = 10 – Q
Marginal Revenue: MR= 10 – 2Q
Total Cost: TC= 3 + Q + 0.5Q2
Marginal Cost: MC = 1 + Q

Where Q is quantity and P is price measured in Wiknam dollars.

a. How many soccer balls does the monopolist produce? At what price they are sold? What
is the monopolist profit?
b. Now assume that free trade is permitted in Wiknam, so soccer balls can be exported or
imported. Note that by entering the world market, the firm is now a price taker, (no
longer a monopoly). If the World Price = $6, what happens to domestic production? What
happens to domestic consumption? Does Wiknam export or import soccer balls? How
many?
c. In Chapter 7, analysis of international trade, a country becomes an exporter when the
price without trade is below the world price and an importer when the price without trade
is above the world price. Does that conclusion hold based on your answer to parts a) and
b) above? Explain
d. Suppose that the world price is not $6 but instead happened to be exactly the same as
domestic price without trade as determined in part a). Now if the country allow trade,
would it change anything in the Wiknamian economy? Explain whether Wiknam
becomes and exporter if the world price is above the domestic equilibrium price and
becomes an importer when world price is below. Include all the relevant information in
your answer.

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