Managerial Economics

Homework Assignment Four

Due at the beginning of class on Monday, May 27

(70 pts.)

 

Homework is due at the beginning of class -- all homework turned in after I have collected it from the class will be considered late - no exceptions.

 

Copy and paste this into a word document and then type your answers.  Graphs do not have to be typed.  MAKE SURE YOU ALWAYS SHOW ALL WORK!!

 

1.  If your accounting profit of operating your business is $110,000 and your economic profit is $30,000, what are your opportunity costs of being in this business?  Explain your answer.  (3 pts.)

2.  Draw a marginal cost curve and explain why it is shaped the way it is.  (3 pts.)

3.  If average fixed costs = $5 and average variable costs = $7 at output level 100: (show all work)

a.  what are total costs? (2 pts.)

b.  if the marginal cost of producing the 101st unit is $15, will average total cost go up or down?  Explain your answer.  (3 pts.)

4.   If you are operating at a loss in the short run (can't sell off your assets yet).  Your fixed costs are $1200 per week.  If you operate your variable costs are $1500 per week. 

a.  Explain how much revenue you would have to obtain from operating to break even. (2 pts.)

b.  Explain how much revenue you would have to obtain from operating to operate and not shut down. (2 pts.)

c.  Graphically illustrate the break-even point (from a above) using average total costs and average revenue curves.  Assume that your break even point is where Q = 300.  Put all numbers on your graph. (including ATC and AR) (5 pts.)

5.  Graphically and in words, explain at what level of output a firm will operate in order to maximize profit or minimize loss? (6 pts.)

6.  Graphically show the following situation:  P = $15 for all units sold.  MC = MR at an output level of 80.  ATC at output level 80 is equal to $18.

 a.  (Graph MR, MC, and ATC). Put all numbers on your graph.  (4 pts.)

 b.  Is this firm making zero economic profit, economic profit, or economic loss?  Explain with numbers and words. (3 pts.)

 c.  What will happen if this firm and others selling the same good continue with this situation?  Explain why - using the concept of opportunity cost.  (4 pts.)

7.  Suppose Bob's Bar-B-Q sells a first sandwich for $16 and then additional sandwiches for $12.

    Suppose that the MC of selling the sandwiches was $8 each.

Suppose that Bob's demand is such that consumers would pay up to $16 for a first sandwich and $12 for a second.

    a.  If Bob charged $12 for both sandwiches, how much would he make (show work): (3 pts.)

    b.  If Bob charged $16 for both sandwiches, how much would he make (show work):  (3 pts.)

    c.  If Bob does his price discrimination scheme above ($16 for the first and $12 for the second), how much would he make (show work): (3 pts.)

    d.  What degree of price discrimination is Bob using - how do you know - explain?  (3 pts.)

8.  Last summer some kids in my neighborhood put up a lemonade stand to the entrance of my subdivision.  Their sign read:  "Lemonade for Sale - Donations Welcome" - meaning the customer decides what they pay.  These are pretty smart kids (after all, they live in my neighborhood).

a.  What kind of price discrimination (degree) are these kids trying to practice - explain.  (3 pts.)

b.  Why might this be a very good pricing strategy for kids selling lemonade in their neighborhood?  Be specific as possible.  (3 pts.)

9.  Suppose that Venus Cable has an educational channel and a music video channel.  There are three segments among the viewer population:  conservatives, middle-of-the-roaders and liberals (modern day).  The table below shows the segment sizes and their monthly benefits (value or maximum price they will pay) for the two channels.  Venus Cable incurs a fixed cost of $100,000 a month, while the marginal cost of providing each channel is zero.

 

a.  If Venus Cable used a single price for each channel (all segments paid the same price for each channel but different prices for the two channels and each segment does not have to buy both channels) -- what should their pricing strategy be to make as much money as possible?  Hint:  There are several possibilities here -- make sure you try them all.  (4 pts.)

 

b.  If Venus Cable decided to bundle or block-book their two channels such that they charged one price for both channels and customers had to buy both (could not buy just one) -- what price would they charge and how much would they make?  (4 pts.)

 

c.  Is block booking more profitable than a single price for Venus Cable?  Explain your answer with numbers. (4 pts.)

 

 

Segment Population Education Channel ($) Music Video Channel ($)
Conservatives 5,000 20 3
Middle-of-the-Roaders 10,000 6 12
Liberals (modern day) 3,000 2 10

 

10.  Explain a situation in which you recently ran across price discrimination when you were shopping.  What was the situation?  Was it first, second or third degree?  Explain why.  (3 pts.)