ECON5300-Homework3-Fall 2014
ECON 5300
Fall 2014
Homework Assignment # 3
(Due by 11:59 p.m. on Tuesday, October 14)
Instructions: Answer any one of the first two questions (Q.1 and Q.2). You must answer Q.3. Your
answers should be precise and complete. Label the graphs clearly and show all your work. Upload
your answers to the Attach File area of Homework Assignment 3. The assignment will be graded on
a scale of 0-8 points.
1. The following table represents the hourly output and cost structure for a local pizza shop. The
market is assumed to be perfectly competitive, and the market price of pizza in the area is $10.
Total costs include all opportunity costs.
Output of pizza per hour
(no. of pizza)
0
1
2
3
4
5
6
7
8
9
10
Total Costs ($)
5
9
11
12
14
18
24
32
42
54
68
a) Calculate the total revenue and total economic profit for this pizza shop at each level of output.
(1 point)
b) Calculate the pizza shop’s marginal cost and marginal revenue at each level of output. Based
on marginal analysis, what is the profit maximizing level of output for the pizza shop? (1 point)
c) Draw a diagram depicting the short-run marginal revenue and marginal cost curves for this
pizza shop, and illustrate the determination of its profit-maximizing level of output. (2 points)
1
2. The demand schedule for drinking water faced by H2O, the monopolist, is as follows:
PRICE
(DOLLARS PER
GALLON)
10
8
6
4
2
0
QUANTITY
DEMANDED
(GALLONS PER HOUR)
0
1
2
3
4
5
a) Calculate H2O’s total and marginal revenue at each quantity. (1 point)
b) H2O has the following total cost. Calculate average total cost and marginal cost of producing
each level of output (1 point)
QUANTITY PRODUCED
(GALLONS PER HOUR)
0
1
2
3
4
5
TOTAL COST
(DOLLARS)
1
3
7
13
21
31
c) Draw the demand curve, the MR curve, and the cost curves and find the profit maximizing
level of output and price. How much profit would it make at this price? Calculate and show
in the diagram (2 points)
2
3. Use the information provided in the following table to fill in the blanks (4 points)
Output
Total fixed
cost
Total
variable cost
Total cost
0
$500
$0
$500
1
$500
$200
2
$800
3
$875
4
Average
fixed cost
$925
5
6
$100
$450
3
Average
variable cost
Average total
cost
Marginal
cost