Wellesley College
Economics 101: Principles of Microeconomics
Fall 2001
Dr. Ananish Chaudhuri

Assignment #3

This assignment will be due back on Tuesday, December 4, 2001.  

Total points = 30

Here are the rules you must follow:

1. It is not necessary that you type your answers. Handwritten answers are 
fine. But your answers must be NEAT and LEGIBLE. 
2. All graphs must be NEATLY drawn and CLEARLY LABELLED.
3. Write only on one side and NOT on both sides of each sheet.
4. Clearly mark your answers so that your answer is readily apparent to me 
and I don't have to search for the answer.
5. Hand in the assignment to me before class. This means you can hand it 
in to me as you enter the class. If you have to miss class for some reason 
then make sure it reaches me before class time. You can drop it off at my 
mail-box located on the fourth floor of Pendleton Office or at my office 
at Pendleton #415.
6. I will penalize you for untidy and sloppy assignments.

Finally please write the time at which your section meets on your answer 
sheet.

Question 1: (15 points)

The following table describes the hypothetical demand and cost function 
for a cable TV company. Output is the number of homes serviced in 
hundreds. Price and total cost is in $. 

Output          Price/household  Total Costs     MC	TR	MR

6               	22.50                   36.00

8               	20.00                   43.00

10              	17.50                   50.00

12              	15.00                   57.00

14              	12.50                   64.00

16              	10.00                   71.00
First notice that Marginal Cost is constant and equal to 3.5. Please 
convince yourself of the fact by filling in the MC column.

Important: Assume that household cannot be fractional i.e you can either 
connect 9 households or 10 but not 10.5. 

(a) If the cable TV company is interested in maximizing profit, how many 
households should they serve? What profit will they earn when they connect 
those many households? Draw a graph to depict this situation.	(3+3+3)

Hint: You might find it easier to answer the question, if you fill in the 
TR and MR columns. Also the number of households that maximize profit, 
need not necessarily appear on the table. 

(b) If, on the other hand, the company is interested in maximizing 
revenue, how many households should they serve? What revenue do they earn?	
(3+3)

Question 2: (15 points)

You own a small pizza place. We will assume that you use only one variable 
input namely labor, which is measured as the number of workers. You have 
the following relation between output and the number of workers. Assume 
that you have to hire workers in whole numbers, i.e. you cannot hire ½ 
worker. 

L	Q

0 0
1 10
2 25
3 35
4 40
5 43
6 45

Each pizza sells for $5. Suppose you have to pay to pay your workers $12. 

(a) How many workers should you hire? What is your total profit?  (3+3)

Now suppose another store opens up right next door and they start selling 
the same exact pizza for $3 each. You are, therefore forced to sell your 
pizza for $3 each as well. 

(b) How would your profit calculations change? How many workers will you 
hire now? What is your corresponding profit? (3+3+3)