# Scenario 6 Peter operates an ice cream shop in the center of Fai...

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Scenario 6 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter’s demand and cost values for sales per day are given in the table below. (Everyone who purchases Peter’s ice cream buys a double scoop cone because it’s so delicious.) Quantity Price MR MC ATC 20 \$5.60 \$5.20 \$2.20 \$2.05 40 \$5.20 \$4.40 \$2.40 \$2.10 60 \$4.80 \$3.60 \$2.60 \$2.15 80 \$4.40 \$2.80 \$2.80 \$2.20 100 \$4.00 \$2.00 \$3.00 \$2.25 120 \$3.60 \$1.20 \$3.20 \$2.30 140 \$3.20 \$0.40 \$3.40 \$2.35 160 \$2.80 -\$0.40 \$3.60 \$2.40 180 \$2.40 -\$1.20 \$3.80 \$2.45 1. Refer to Scenario 6. How many ice cream cones should Peter sell in one day to maximize his profits? 2. Refer to Scenario 6. When Peter maximizes his profits, how much revenue does he earn per day? 3. Refer to Scenario 6. What price should Peter charge to maximize his profits? 4. Refer to Scenario 6. When Peter maximizes his profits, what is his total cost per day? 5. Refer to Scenario 6. What is the maximum amount of profit that Peter can earn per day? Scenario 2. A competitive firm sells its output for \$20 per unit. When the firm produces 200 units of output, average variable cost is \$16, marginal cost is \$18, and average total cost is \$23. 6. Refer to Scenario 2. Compare the firm’s profit or loss at 200 units of output with its profit or loss if it were to shut down. 7. Refer to Scenario 2. Calculate the firm’s fixed cost at 200 units of output. 8. Refer to Scenario 2. Is the firm maximizing its profit (or minimizing its loss) by producing 200 units of output? 9. Refer to Scenario 2. Calculate the firm’s total revenue, total cost, and profit at 200 units of output. Figure 5 10. Refer to Figure 5. If the monopolist uses perfect price discrimination, how much deadweight loss results? 11. Refer to Figure 5. How much consumer surplus results if this single-price monopolist profit-maximizes? 12. Refer to Figure 5. Which is more efficient, single price profit maximization or perfect price discrimination? 13. Refer to Figure 5. How much deadweight loss results if this single-price monopolist profit-maximizes? 14. Refer to Figure 5. If the monopolist uses perfect price discrimination, how much profit does the firm earn? 15. Refer to Figure 5. How much profit will this monopolist earn if it charges each consumer the same price? 16. Refer to Figure 5. If the monopolist uses perfect price discrimination, how much output does the firm produce? Scenario 5 Vincent operates a scenic tour business in Boston. He has one bus which can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at \$450. Vincent’s cost is not reduced if he runs a tour with a partially full bus. While his cost is the same for all tours, Vincent charges each passenger his/her willingness to pay: adults \$18 per trip, children \$10 per trip, and senior citizens \$12 per trip. At those rates, on a typical day Vincent’s demand is: Passenger Type Willingness to Pay Demand per day Adults \$18 70 Children \$10 25 Senior Citizens \$12 55 Assume that Vincent’s customers are always available for the tour; therefore, he can fill his bus for each tour as long as there is sufficient total demand for the day. 17. Refer to Scenario 5. What is Vincent’s cost of serving all passengers demanding a tour on a typical day? 18. Refer to Scenario 5. One of Vincent’s friends tells him he would be more profitable if he charged a single price of \$12. Assuming no changes in consumer demand, what would Vincent’s profit be if he charged every customer \$12? 19. Refer to Scenario 5. One of Vincent’s friends tells him he would be more profitable if he charged a single price of \$18. Assuming no changes in consumer demand, what would Vincent’s profit be if he charged every customer \$18? 20. Refer to Scenario 5. Vincent uses a pricing practice called 21. Refer to Scenario 5. What is Vincent’s profit on a typical day? Figure 8. The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop. 22. Refer to Figure 8. The production process depicted on the graph exhibits _______ marginal product of labor. 23. Refer to Figure 8. What is the marginal product of the third mechanic? 24. Refer to Figure 8. Suppose the shop charges \$125 per repair. Over what interval of wages, W, would the shop maximize its profit by hiring exactly 4 mechanics? (Determine and such that .) 25. Refer to Figure 8. If the shop charges \$120 per repair, then what is the value of the marginal product of the third mechanic? 26. Refer to Figure 8. Suppose the shop pays each of its mechanics \$210 per day. Over what interval of prices (that is, charges per car repair, P) would the shop maximize its profit by hiring exactly 3 mechanics? (Determine and such that .) 27. Refer to Figure 8. If the shop charges \$120 per repair and pays each of its mechanics a wage of \$400 per day, then what is the marginal profit of the third mechanic? Table 2 Labor Output Marginal Product Variable Cost Fixed Cost 0 0 -- \$0 \$5 1 100 100 \$5 \$5 2 250 \$10 \$5 3 350 \$15 \$5 4 50 \$20 \$5 5 25 \$25 \$5 6 430 \$30 \$5 28. Refer to Table 2. What is the average variable cost of producing 400 units of output? 29. Refer to Table 2. What is the average total cost of producing 425 units of output? 30. Refer to Table 2. What is the shape of the average-fixed-cost curve? 31. Refer to Table 2. What is the shape of the average-total-cost curve? 32. Refer to Table 2. What is the shape of the average-variable-cost curve? Table 1 Labor Output Marginal Product Variable Cost Fixed Cost 0 0 -- \$0 \$10 1 200 200 \$20 \$10 2 350 \$40 \$10 3 450 \$60 \$10 4 50 \$80 \$10 5 25 \$100 \$10 6 530 \$120 \$10 33. Refer to Table 1. What is the shape of the firm’s total-cost curve? 34. Refer to Table 1. What is the total output of four workers? 35. Refer to Table 1. What is the shape of the average-total-cost curve? 36. Refer to Table 1. What is the marginal product of the third worker? Scenario 1 Suppose that a small family farm sold its output for \$100,000 in a given year. The family spent \$25,000 on fuel, \$40,000 on seed, fertilizer, and pesticides, and \$25,000 on equipment, including maintenance. The family members could have earned \$20,000 working at other occupations. 37. Refer to Scenario 1. What is the economic profit for the family farm? 38. Refer to Scenario 1. What is the accounting profit for the family farm? 39. Nike and Reebok (athletic shoe companies) are considering whether to advertise during the Super Bowl. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision. Does the repeated game scenario differ from a single period game? Is it possible that a repeated game (without collusive agreements) could lead to an outcome that is better than a single-period game? Explain the circumstances in which this may be true. 40. Suppose the market for home-grown peppers in the town of Tombstone is comprised of two farmers. Suppose the two farmers try to collude. Explain why their collusion might not be successful. 41. There has been much discussion of deregulating electricity and natural gas delivery companies in the United States. Discuss the likely effect of deregulation on prices in these two industries. 42. Complete Chapter 13 Problem # 7 and Discuss. 43. Complete Chapter 14 Problem #12 and Discuss. 44. Complete Chapter 17 Problem # 4 and Discuss. 45. In your own words and giving an example, how does technological advance affect the demand for labor? Discuss a specific example in the real world. This question should be typed and about one side of one page in length.

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1. Peter should sell 80 ice creams in one day where his marginal cost MC is equal to marginal revenue MR at \$2.80 in order to maximize his profits.

2. When Peter maximizes his profits, the revenue he earns is equal to the TR (total revenue) = Quantity * Price
TR= 80*4.40 = \$352

3. Peter should charge a price of \$4.40 where MC equals MR.

4. When peter maximizes his profits at 80 units per day, his average total cost is equal to \$2.20 and hence his total costs per day = 80 * 2.20 = \$176.

5. The maximum amount of profit earned by Peter per day is equal to total revenue – total cost and hence profit = \$352-\$176 = \$176

Scenario 2. A competitive firm sells its output for \$20 per unit. When the firm produces 200 units of output, average variable cost is \$16, marginal cost is \$18, and average total cost is \$23.

6. Total revenue = 200*20 = \$4000
Total costs = 200*23=\$4600
Loss = 4000-4600 = \$600
Total variable costs = 200*16 = 3200
As the firm is able to cover its variable costs, it will continue to run in the business and will not shut down. The firm will shut down when its price is lower than its average variable costs that is at \$16 as any quantity sold below the price of \$16, the firm will not be able to cover even the average variable costs at \$16 and this will force the firm to shut down in the long run.

7. The firms average fixed costs = average total costs – average variable costs
AFC= \$23-\$16 = \$7...

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