Problem 1: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Market demand function: Q = 200 - 2P (direct form, which shows Q as a function of P) Market demand function in the indirect form: P = 100 – 0.5Q (indirect form because it shows P as a function of Q). Marginal revenue function: MR = 100 – Q (Notice that the slope of the MR function is twice the slope of the inverse demand function). Total Cost function: TC = 5Q Average Cost function: AC = (TC/Q) = 5 Marginal Cost function: MC = 5 [Note that whenever marginal cost is a constant number, MC will always be equal to AC.]

(a) Plot the demand and marginal revenue functions given. Plot the marginal cost and average cost information given.

(b) Find the output level that will be produced by a profit maximizing monopolist in a market equilibrium. Label it QM.

(c) Once you have found the monopolist’s profit maximizing quantity, find the price the monopolist will charge in the market. Label it PM.

(d) Find the numerical value of the total revenue earned by the monopolist at QM. Label the area on your graph.

(e) Find the numerical value of the total cost earned by the monopolist at QM. Label the area on your graph.

(f) Find the numerical value of the profit earned by the monopolist at QM. Label the area on your graph.

(g) Can you identify the area of the market consumer surplus at QM? Label the area of your graph. (Note you have to read the textbook chapter15 before doing this part. If you do not remember what is consumer surplus, take a quick look at chapter 7.?

(h) Label the producer surplus earned by the monopolist at QM.

(i) You are given the inverse demand function and the marginal cost value. Can you find the total industry output that would have been produced if this industry had been a perfectly competitive industry (instead of being a monopoly)? Label the perfectly competitive level of industry output on your graph as QC.

(j) Label the total market consumer surplus in the case of a perfectly competitive industry. Can you identify the area that shows the difference in consumer surplus amount between the monopoly industry and the perfectly competitive industry?

(k) Label the total market producer surplus in the case of a perfectly competitive industry. Can you identify the area that shows the difference in producer surplus amount between the monopoly industry and the perfectly competitive industry?

3) Perfectly competitive markets

# of Contraptions

Total Cost

0. 0 500

1. 1 580

2. 2 640

3. 3 690

4. 4 730

5. 5 760

6. 6 800

7. 7 850

2

8 950

9 1200 10 2000

a) Calculate the marginal cost for contraptions, given the above information, add it to your Table, and graph it.
b) Where does diminishing returns set in? Explain how you know.
c) If market price equals $100, how many units should be produced? What is revenue? What is profit? Add these columns to your Table too.

d) What is the fixed cost? Would the number of units produced change if the fixed cost went down? Why or why not?
e) Firms now exit the contraption market, and contraption price goes up to $250. Graph this result, showing market and firm graph side by side. How many units will a firm with the above cost function produce? What will profit be? (It might be helpful to show a new Table or at least add a couple of columns to the existing one).

f) At this point, will more firms exit, or will new firms start to enter the market? Explain.
g): What is the long run equilibrium price? What is profit? (Show all calculations) Why will firms not leave the market?

A firm operating in a perfectly competitive market has the following total cost function: TC=0.4Q²+40 There are 20 identical firms in the short-run in the market. In addition, the demand function is given by: Q=300-5P

a) Find the Supply Function for the Firm in the short-run

b) What is the equilibrium price and quantity in the market in the short-run?

c) How much does each of the 20 firms produce in the short-run?

d) How much profits does each firm make in the short-run? Will there be entry or exit in the long-run?

Units Demanded: Q = 500-40P Total Cost = 300 + Q Price Per Unit = 6 Find: Q, Revenue, and Profit Negative Externality Unit Cost = 2 Recalculate Revenue and Profit if Costs are Internalized and i) passed on to consumers, or they are ii) absorbed by the firm.

Nova Company’s total overhead cost at various levels of activity are presented below:

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 39,000 machine-hour level of activity is:

Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $235,490 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $235,490 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.)

2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX.

3. Express the company’s total overhead cost in the form Y = a + bX.

4. What total overhead cost would you expect to be incurred at an activity level of 44,000 machine-hours?

Dunning Farms, Inc. raises organic turkeys. The total cost to process 73,000 turkeys is $28,500. Each turkey can be sold at this point for $65 each or go through a smoking process (further processing) and be sold for $85 each. The total cost of the smoking process is $260,000. Should the turkeys be sold at the split-off point or processed further? Show your calculations.

On January 1, 2014, Courier Inc. purchased new equipment that had a total cost (including shipping and installation) of $82,000. The equipment is expected to have a useful life of four years or produce a total of 122,000 units. At the end of its life, the equipment is expected to have a residual value of $4,900. The equipment is expected to produce 25,620 units in 2014; 32,940 units in 2015; 34,160 units in 2016; and 29,280 units in 2017. Courier Inc.'s fiscal year ends on December 31.

In the table below, fill in the missing depreciation expense and accumulated depreciation amounts using the straight-line, double-declining-balance, and units-of-production methods. Do not round your intermediate calculation. When required, round your answers to the nearest dollar.

Red Rider makes three types of electric scooters. The company’s total fixed cost is $1,296,000,000. Selling prices, variable cost, and sales percentages for each type of scooter follow:

Selling Price Variable Cost Percent of Total Unit Sales

Mod. $2,200.   $1,900.   30

Rad. $3,700.   $3,000.   50

X-treme $6,000.   $5,000.   20

a. What is Red Rider’s break-even point in units and sales dollars?

Units. Dollars

Mod

Rad

X-treme

Total

b. If the company has an after-tax income goal of $1 billion and the tax rate is 50 percent, how many units of each type of scooter must be sold for the goal to be reached at the current sales mix?

Units. Dollars

Mod

Rad

X-treme

Total

c. Assume the sales mix shifts to 50 percent Mod, 40 percent Rad, and 10 percent X-treme. How does this change affect your answer to (a)?
Note: Do not round until you determine the number of units of each product; round number of units to the next highest whole unit in your calculations.

Units. Dollars

Mod

Rad

X-treme

Total

Nova Company’s total overhead cost at various levels of activity are presented below:

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:

Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $216,860 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $216,860 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.)

2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX.

3. Express the company’s total overhead cost in the form Y = a + bX.

4. What total overhead cost would you expect to be incurred at an activity level of 41,000 machine-hours?

XM Radio was depreciating its satellites over 20 years (total cost of $20 million), for each of five satellites, useful life is only seven years due to the intensity of the sun rays.
With reference to the scenario, answer the following questions:

1. How and when should this discovery be recorded in the financial statements of the company? Explain your response.
2. If the company issues quarterly financial statements and the discovery is made in the third quarter, should this impact be shown prospectively or retroactively and in what specific time period? Explain your response .