a. Calculate average variable cost, average total cost, and marginal cost for each quantity. b. Graph all three curves. What is the relationship between the marginal-cost curve and the average-total-cost curve? Between the marginal-cost curve and the average-variable-cost curve? Explain.

12. Consider the following table of long-run total costs for three different firms:

Quantity 1 2 3 4 5 6 7

Firm A $60 $70 $80 $90 $100 $110 $120 Firm B 11 24 39 56 75 96 119 Firm C 21 34 49 66 85 106 129

Does each of these firms experience economies of scale or diseconomies of scale

1. A publisher faces the following demand schedule for the next novel from one of its popular authors:

Price Quantity Demanded

$100 0 novels 90 100,000 80 200,000 70 300,000 60 400,000 50 500,000 40 600,000 30 700,000 20 800,000 10 900,000 0 1,000,000

The author is paid $2 million to write the book, and the marginal cost of publishing the book is a constant $10 per book.

a. Compute total revenue, total cost, and profit at each quantity. What quantity would a profit-maximizing publisher choose? What price would it charge?

b. Compute marginal revenue. (Recall that MR = ΔTR/ΔQ.) How does marginal revenue compare to the price? Explain. c. Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do the marginal-revenue and marginal-cost curves cross? What does this signify?

d. In your graph, shade in the deadweight loss. Explain in words what this means.

e. If the author were paid $3 million instead of $2 million to write the book, how would this affect the publisher‘s decision regarding what price to charge? Explain.

f. Suppose the publisher was not profit-maximizing but was concerned with maximizing economic efficiency. What price would it charge for the book? How much profit would it make at this price?

2. A small town is served by many competing supermarkets, which have the same constant marginal cost.

a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus.

b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?

3. Johnny Rockabilly has just finished recording his latest CD. His record company‘s marketing department determines that the demand for the CD is as follows:

Price Number of CDs

$24 10,000 22 20,000 20 30,000 18 40,000 16 50,000 14 60,000

The company can produce the CD with no fixed cost and a variable cost of $5 per CD. a. Find total revenue for quantity equal to 10,000, 20,000, and so on. What is the marginal revenue for each 10,000 increase in the quantity sold?

b. What quantity of CDs would maximize profit? What would the price be? What would the profit be?