Please follow instructions carefully. (1) Homeworks should be typed or handwritten NEATLY. Sloppy, untidy homework assignments would be penalized. (2) Please write only on one side of the sheet and not on both sides. (3) Please circle or highlight your answers so that they are clearly legible. (4) All homeworks would be due back before class on Tuesday,April 3, 2001. You can hand in the homework to me right before class. Or if you cannot make it to class then make sure you drop the homework off. You can leave it with one of the administrative assistants Wanda Walters (CIC 125A) or Karen Davis in the CIC building or put it in my mailbox. I will NOT accept late homework assignments. (5) Please DO NOT FORGET to write your name on your homework clearly.
In answering the questions and drawing please make sure that your writing is legible and the graphs are drawn neatly. It is VERY IMPORTANT that I can make out your writing or your drawing - sloppy, untidy homeworks will be penalized!
There are 3 problems. Each problem is worth 10 points for a total of 30 points.
Problem 1: You own a video tape rental store, one of 25 in a small town, thereby making the video tape rental market competitive. Each of the stores gets its tapes from the same distributor of movies and all have the same stock. You estimate that you have fixed costs of $1000 per week and your variable costs as shown below. The rental price of a video tape is $3.00. You as a producer in a competitie market cannot raise that price or you will lose all your customers. (1) Fill out the remaining columns for MC, TR and MR. (2)What is the profit maximizing level of tapes that you should be renting per week? How do you know this? (3)What do you think is going to happen in the market for video tape rentals in the long run? Why? Quantity per week TVC MC TR MR 1000 2000 2000 3500 3000 5900 4000 8500 5000 11300 6000 14300 7000 17500 8000 20900 9000 24500 Show your work clearly. Problem 2: Can you complete the table by filling in the blanks? Quantity AFC TVC AC MC TC 0 XXX XXX XXX 10 20 20 30 11 390 40 420 50 2 14 Problem 3: 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 Market Price/household Total Costs MC 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. (1) If the producer wants to maximize profit, how many households should he serve? What is the corresponding price that is charged? What profit does the producer make at this point? (2) If the producer wants to maximize revenue how many households should he serve and what prioce should he charge? This problem requires you to think a little. You might also want to figure out the equation of the demand curve - which may help you. But it is not absolutely not necessary.