Some Solutions to Krugman Wells Microeconomics

About the Page
Below, find some answers to book problems from Paul Krugman and Robin Wells' "Microeconomics".  I'm told these questions appear in the earlier edition of the textbook, their "Economics" textbook (combining topics in Micro and Macro) as well as are likely to cover questions of editions to come. 

The solutions below were made as prep and notes for an "Intro to Microeconomics" class I TA'd.  
~Thus they are a rough first draft sketches of solutions (please don't hold them against me!).












Part 1 - What is Economics? 

Chapter 1 - First Principles -- opportunity costs, equilibrium, marginal analysis, efficiency.





















          








































Chapter 2 - Economic Models: Trade-offs and Trade -- PPF, feasibility and efficiency, normative vs. positive statements. 










According to data from the US Department of Agriculture's National Agricultural Statistics Service, 124 million acres of land in the United States were used for wheat or corn farming in 2004. Of those 124 million acres, farmers used 50 million acres to grow 2.158 billion bushels of wheat and 74 million acres of land to grow 11.807 billion bushels of corn. Suppose that US wheat and corn farming is efficient in production. At that production point, the opportunity cost of producing one additional bushel of wheat is 1.7 fewer bushels of corn. However, farmers having increasing opportunity costs, so that additional bushels of wheat have an opportunity cost greater than 1.7 bushels of corn. For each of the following production points, decide whether that production point is (i) feasible and efficient in production, (ii) feasible but not efficient in production (iii) not feasible, or (iv) unclear as to whether or not it is feasible.












          

  

























































Chapter 2 appendix - Graphs in Economics


     Nadda - This stuff is pretty strait-forward. 



Part 2 - Supply and Demand

Chapter 3 - Supply and Demand -- curve shifts, analysis, equilibrium price & quantity.



a. The market for newspapers in your town. 
Case 1: The salaries of journalists go up. 
Case 2: There is a big news event in your town, which is reported in the newspapers
b. The market for St. Louis Rams cotton T-shirts
Case 1: The Rams win the Super Bowl
Case 2: The price of cotton increases. 
c. The market for bagels
Case 1: People realize how fattening bagels are. 
Case 2: People have less time to make themselves a cooked breakfast. 
d. The market for the Krugman & Wells economics textbook. 
Case1: Your professor makes it required reading for all of his or her students. 
Case 2: Printing costs for textbooks are lowered by the use of synthetic paper.








Supply and Demand Curve Analysis
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 3, Question 11
Video 8:05 - http://youtu.be/qb9gDpzRptQ
In Rolling Stones magazine, several fans and rock stars, including Pearl Jam, were bemoaning the high price of concert tickets. One superstar argued, "It just isn't worth $75 to see me play. No one should have to pay that much to go to a concert." Assume this star sold out arenas around the country at an average ticket price of $75. 

a. How would you evaluate the arguments that ticket prices are too high?
b. Suppose that due to this star's protests, ticket prices were lowered to $50. In what sense is this price too low? Draw a diagram using supply and demand curves to support your argument.
c. Suppose Pearl Jam really wanted to bring down ticket prices. Since the band controls the supply of its services, what do you recommend they do? Explain using a supply and demand diagram.
d. Suppose the band's next CD was a total dud. Do you think they would still have to worry about ticket prices being too high? Why or why not? Draw a supply and demand diagram to support your argument.
e. Suppose the group announced their next tour was going to be their last. What effect would this likely have on the demand for and price of tickets? Illustrate with a supply and demand diagram.




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A Brief Lecture on Supply and Demand













































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Chapter 4 - Consumer and Producer Surplus






























































         
 

  








































































Chapter 5 - The Market Strikes Back -- price controls, price floor, price ceiling, quota, quantity controls.




Video 15:19 - https://www.youtube.com/watch?v=3jxCwP4N5ww
In the late eighteenth century, the price of bread in New York City was controlled, set at the predetermined price above the market price.

a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor?

b. What kind of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail.

One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market piece. New York bakers found that the controlled price of bread in New York was below the market price.

c. Draw a diagram showing the effect of the price control on the market for bread during this one-year period. Did the policy act as a price ceiling or a price floor?

d. What kinds of inefficiencies do you think occurred during this period? Explain in detail.















         
 

  




















































Chapter 6 - Elasticity -- demand elasticity, income elasticity.




Working Through Elasticity Examples. from Krugman Wells – Microeconomics 2nd Ed. – Chapter 6, Question 11
Video 11:52 - https://www.youtube.com/watch?v=zVuHHOUhp14
Use an elasticity concept to explain each of the following observations.

a. During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionally greater than the number of other new businesses, such as grocery stores.

b. Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter.

c. Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time.

d. Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumer in a more developed country like Canada.





































         
 

  











































Part 3 - Individuals and Markets

Chapter 7 - Taxes -- excise taxes.



Excise Tax Example – Excise Tax on Cars
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 7, Question 3
Video 15:02 - https://www.youtube.com/watch?v=axgM7dpRbbw
In 1990, the United States began to levy a tax on luxury cars.  For simplicity, assume the tax was an excise tax of $6,000 per car.

a. Under the tax, what is the price paid by consumers? What is the price received by producers? What is the government tax revenue from the excise tax?

Over time, the tax on luxury automobiles was slowly phased out (and completely eliminated in 2002). Suppose that the excise tax falls from $6,000 per car to $4,500 per car.

b. After the reduction in the excise tax from $6000 to $4500 per car, what is the price paid by consumers? What is the price received by producers? What is the tax revenue now?

c. Compare the tax revenue created by the taxes in parts a and b. What Accounts for the change in tax revenue from the reduction in the excise tax?




Tax Example – Excise Tax on Cigarettes
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 7, Question 5
Video 16:20 - https://www.youtube.com/watch?v=DpAUgi9O2qE
In the United States, each state government can impose its own excise tax on the sale of cigarettes. Suppose that in the state of North Texarkana, the state government imposes a tax of $2.00 per pack sold within the state. In contrast, the neighboring state of South Texarkana imposes no excise tax on cigarettes. Assume that in both states the pre-tax price of a pack of cigarettes is $1,00. Assume that the total cost to a resident of North Texarkana to smuggle a pack of cigarettes from South Texarkana is $1.85 per pack. (This includes the cost of time, gas, and so on). Assume that the supply curve for cigarettes is neither perfectly elastic nor perfectly inelastic.

a. Draw a diagram of the supply and demand curves for cigarettes in North Texarkana showing a situation in which it makes economic sense for a North Texarkanan to smuggle a pack of cigarettes from South Texarkana to North Texarkana. Explain your diagram.

b. Draw a corresponding diagram showing a situation in which is does not make economic sense for a North Texarkanan to smuggle a pack of cigarettes from the South to the North. Explain your diagram.

c. Suppose the demand for cigarettes in North Texarkana is perfectly inelastic. How high could the cost of smuggling a pack of cigarettes go until a North Texarkanan no longer found it profitable to smuggle?

d. Still assume that demand for cigarettes in North Texarkana is perfectly inelastic and that all smokers in the North are smuggling their cigarettes at a cost of $1.85 per pack, so no tax is paid. Is there any inefficiency in this situation? If so, how much per pack? Suppose chip embedded cigarette packaging makes it impossible to smuggle cigarettes across the state border. Is there any inefficiency in this situation? If so, how much per pack?




























































Chapter 8 - International Trade



Part 4 - Economics and Decision Making

Chapter 9 - Making Decisions -- marginal analysis. 



Marginal Analysis – CDC and Smallpox Vaccination

from Krugman Wells – Microeconomics 2nd Ed. – Chapter 9, Question 9
Video 9:24 - https://www.youtube.com/watch?v=tKmzUYttrzY
The Centers for Disease Control and Prevention (CDC) recommended against vaccinating the whole population against the smallpox virus because the vaccination has undesirable, and sometimes fatal side effects. Suppose the accompanying table gives the data that are available about the effects of a smallpox vaccination program.

Percent of Population Vaccinated

Deaths due to smallpox

Deaths due to vaccination side effects

0%

200

0

10%

180

4

20%

160

10

30%

140

18

40%

120

33

50%

100

50

60%

80

74



a. calculate the marginal benefit (in terms of lives saved) and the marginal cost (in terms of lives lost) of each 10% increment of smallpox vaccination. Calculate the net gain for each 10% increment in population vaccinated.

b. Using marginal analysis, determine the optimal percentage of the population that should be vaccinated.



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Part 5 - The Consumer

Chapter 10 - The Rational Consumer



Marginal Utility Examples – Increasing, Diminishing and Constant
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 10 (The Rational Consumer), Question 1
Video 6:24 - https://www.youtube.com/watch?v=BS-3NXVpdaA
For each of the following situations, decide whether Al has increasing, constant, or diminishing marginal utility.

a. The more economics classes Al takes, the more he enjoys the subject. And the more classes he takes, the easier each one gets, making him enjoy each additional class even more than the one before.

b. Al likes loud music. In fact, according to him, “the louder, the better.” Each time he turns the volume up a notch, he adds 5 utils to his total utility.

c. Al enjoys watching reruns of the old sitcom Friends. He claims that these episodes are always funny, but he does admit that the more he sees an episode, the less funny it gets.

d. Al loves toasted marshmallows. The more he eats, however, the fuller he gets and the less he enjoys each additional marshmallow. And there is a point at which he becomes satiated: beyond that point, more marshmallows actually make him feel worse rather than better.






Marginal Utility Calculation Example – Optimal Consumption Bundle
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 10 (The Rational Consumer), Question 3
Video 4:43 - https://www.youtube.com/watch?v=tmfXKaUjo5Q
Brenda likes to have bagels and coffee for breakfast. The accompanying table shows Brenda’s total utility from various consumption bundles of bagels and coffee.
    

Consumption Bundle

Quantity of Bagels

Quantity of Coffee (cups)

Total Utility (utils)

0

0

0

0

2

28

0

4

40

1

2

48

1

3

54

2

0

28

2

2

56

3

1

54

3

2

62

4

0

40

4

2

66



Suppose Brenda knows she will consume 2 cups of coffee for sure. However, she can choose to consume different quantities of bagels: she can choose either 0, 1, 2, 3, or 4 bagels.

a. Calculate Brenda’s marginal utility from bagels as she goes from consuming 0 bagel to 1 bagel, from 1 bagel to 2 bagels, from 2 bagels to 3 bagels, and from 3 bagels to 4 bagels.

b. Draw Brenda’s marginal utility curve of bagels. Does Brenda have increasing, diminishing, or constant marginal utility of bagels?







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Optimal Consumption Bundle Example Explored – Income and Substitution Effect
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 10 (The Rational Consumer), Question 4
Video 11:18 - http://www.youtube.com/watch?v=zHrrsJlXVt8
Brenda, the consumer in Problem 3, now has to make a decision about how many bagels and how much coffee to have for breakfast. She has $8 of income to spend on bagels and coffee. Use the information given in the table in Problem 3 to answer the following questions.
a. Bagels cost $2 each, and coffee costs $2 per cup. Which bundles are on Brenda’s budget line? For each of these bundles, calculate the level of utility (in utils) that Brenda enjoys. Which bundle is her optimal bundle?
b. The price of bagels increases to $4, but the price of coffee remains at $2 per cup. Which bundles are now on Brenda’s budget line? For each bundle, calculate Brenda’s level of utility (in utils). Which bundle is her optimal bundle?
c. What do your answers to parts a and b imply about the slope of Brenda’s demand curve for bagels? Describe the substitution effect and the income effect of this increase in the price of bagels, assuming that bagels are a normal good.








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Chapter 11 - Consumer Preferences and Consumer Choice 



Utility Maximization with Budget Constraint & Indifference Curves – Price & Income Changes
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 11 (Consumer Preferences and Consumer Choice), Question 11
Video 11:22 - http://www.youtube.com/watch?v=airLmoNWNw8
Tyrone is a utility maximizer. His income is $100, which he can spend on cafeteria meals and on notepads. Each meal costs $5, and each notepad costs $2. At these prices Tyrone chooses to buy 16 cafeteria meals and 10 notepads.

a. Draw a diagram that shows Tyrone’s choice using an indifference curve and his budget line, placing notepads on the vertical axis and cafeteria meals on the horizontal axis. Label the indifference curve I1 and the budget line BL1.

b. The price of notepads falls to $1; the price of cafeteria meals remains the same. On the same diagram, draw Tyrone’s budget line with the new prices and label it BLH.

c. Lastly, Tyrone’s income falls to $90. On the same diagram, draw his budget line with this income and the new prices and label it BL2. Is he worse off, better off, or equally as well off with these new prices and lower income than compared to the original prices and higher income? (Hint: Determine whether Tyrone can afford to buy his original consumption bundle of 16 meals and 10 notepads with the lower income and new prices.) Illustrate your answer using an indifference curve and label it I2

d. Give an intuitive explanation of your answer to part c.





Utility Maximization Example with Inferior Good – Price Change, Income & Substitution Effect
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 11 (Consumer Preferences and Consumer Choice), Question 13
Video 12:57 - http://www.youtube.com/watch?v=nR3dyoPjgjc
Pam spends her money on bread and Spam, and her indifference curves obey the four properties of indifference curves for ordinary goods. Suppose that, for Pam, Spam is an inferior, but not a Giffen, good; bread is a normal good. Bread costs $2per loaf, and Spam costs $2 per can. Pam has $20 to spend.

a. Draw a diagram of Pam’s budget line, placing Spam on the horizontal axis and bread on the vertical axis. Suppose her optimal consumption bundle is 4 cans of Spam and 6loaves of bread. Illustrate that bundle and draw the indifference curve on which it lies.

b. The price of Spam falls to $1; the price of bread remains the same. Pam now buys 7 loaves of bread and 6 cans of Spam. Illustrate her new budget line and new optimal consumption bundle in your diagram. Also draw the indifference curve on which this bundle lies.

c. In your diagram, show the income and substitution effects from this fall in the price of Spam. Remember that Spam is an inferior good for Pam.






Utility Maximization Example with Perfect Compliments – Price Change, Income Effect
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 11 (Consumer Preferences and Consumer Choice), Question 15
Video 10:40 - http://www.youtube.com/watch?v=tnehG-Qn_Rg
For Crandall, cheese cubes and crackers are perfect complements: he wants to consume exactly 1 cheese cube with each cracker. He has $2.40 to spend on cheese and crackers. One cheese cube costs 20 cents, and 1 cracker costs 10 cents. Draw a diagram, with crackers on the horizontal axis and cheese cubes on the vertical axis, to answer the following questions.

a. Which bundle will Crandall consume?

b. The price of crackers rises to 20 cents. How many cheese cubes and how many crackers will Crandall consume?

c. Show the income and substitution effects from this price rise.



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Part 6 - The Product Decision

Chapter 12 - Behind the Supply Curve: Inputs and Costs






























Calculate Total Cost, and Minimum-Cost Output (Example from Intro to Microeconomics)
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 12 (Behind the Supply Curve: Inputs & Costs), Question 13
Don owns a small concrete-mixing company. His fixed cost is the cost of the concrete-batching machinery and his mixer trucks. His variable cost is the cost of the sand, gravel, and other inputs for producing concrete; the gas and maintenance for the machinery and trucks; and his workers. He is trying to decide how many mixer trucks to purchase. He has estimated the costs shown in the accompanying table based on estimates of the number of orders his company will receive per week.

Variable Costs (VC)

Quantity of Trucks

Fixed Cost (FC)

20 Orders

40 Orders

60 Orders

2

$6,000

$2,000

$5,000

$12,000

3

7,000

1,800

3,800

10,800

4

8,000

1,200

3,600

8,400



a. For each level of fixed cost, calculate Don’s total cost for producing 20, 40, and 60 orders per week.

b. If Don is producing 20 orders per week, how many trucks should he purchase and what will his average total cost be? Answer the same questions for 40 and 60 orders per week.







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How to Find Total Cost, Average Total Costs, and Average Variable Costs – Given Marginal Costs.
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 12 (Behind the Supply Curve: Inputs & Costs), Question 8
You have the information shown in the accompanying table about a firm’s costs. Complete the missing data.

Quantity of DVDs

TC

MC

0

$20

1

?

$20

2

?

10

3

?

16

4

?

20

5

?

24








Calculate Total Cost, and Minimum-Cost Output (Example from Intro to Microeconomics)
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 12 (Behind the Supply Curve: Inputs & Costs), Question 14
Consider Don’s concrete-mixing business described in Problem 13. Assume that Don purchased 3 trucks, expecting to produce 40 orders per week.

a. Suppose that, in the short run, business declines to 20 orders per week. What is Don’s average total cost per order in the short run? What will his average total cost per order in the short run be if his business booms to 60 orders per week?

b. What is Don’s long-run average total cost for 20 orders per week? Explain why his short-run average total cost of producing 20 orders per week when the number of trucks is fixed at 3 is greater than his long-run average total cost of producing 20 orders per week.

c. Draw Don’s long-run average total cost curve. Draw his short-run average total cost curve if he owns 3 trucks.




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Chapter 13 - Perfect Competition and the Supply Curve

from Krugman Wells – Microeconomics 2nd Ed. – Chapter 13 (Perfect Competition and the Supply Curve), Question 3.
Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the accompanying table.

Quantity of Meals

Variable Cost (VC)

Total Cost

Marginal Cost of  a Meal

Average Variable Cost (AVC) of a Meal

Average Total Cost (ATC) of a Meal

0

$0

$100

MC=TC/Q

AVC=VC/Q

ATC=TC/Q

10

200

$300

$20

$20

$30

20

300

$400

10

15

20

30

480

580

18

16

19.33

40

700

800

22

17.50

20

50

1,000

1,100

30

20

22



a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output.

b. What is the break-even price? What is the shut-down price?   

c. Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?

d. Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?

e. Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?










Break Even Price and Shut Down Price – Calculate and Interpret.
Video 16:34 - https://www.youtube.com/watch?v=0nrt-SFwvOI
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 13 (Perfect Competition and the Supply Curve), Question 5
Consider Bob’s DVD company described in Problem 4.
Assume that DVD production is a perfectly competitive industry. For each of the following questions, explain your answers.

a. What is Bob’s break-even price? (13.83) What is his shut-down price? ($3)

b. Suppose the price of a DVD is $2. What should Bob do in the short run?

c. Suppose the price of a DVD is $7. What is the profit-maximizing quantity of DVDs that Bob should produce? What will his total profit be? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run?

d. Suppose instead that the price of DVDs is $20. Now what is the profit maximizing quantity of DVDs that Bob should produce? What will his total profit be now? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run?




Example of a Firm in a Perfectly Competitive Market - Economic Profits and Firm Entry
Video 14:41 -
https://www.youtube.com/watch?v=S3nulylUYQ0
from Krugman Wells – Microeconomics 2nd Ed. – Chapter 13 (Perfect Competition and the Supply Curve), Question 13
The accompanying table presents prices for washing and ironing a man’s shirt taken from a survey of California dry cleaners in 2004.

Dry Cleaner

City

Price

A-1 Cleaners

Santa Barbara

$1.50

Regal Cleaners

Santa Barbara

1.95

St. Paul Cleaners

Santa Barbara

1.95

Zip Kleen Dry Cleaners

Santa Barbara

1.95

Effie the Tailor

Santa Barbara

2.00

Magnolia Too

Goleta

2.00

Master Cleaners

Santa Barbara

2.00

Santa Barbara Cleaners

Goleta

2.00

Sunny Cleaners

Santa Barbara

2.00

Casitas Cleaners

Carpinteria

2.10

Rockwell Cleaners

Carpinteria

2.10

Norvelle Bass Cleaners

Santa Barbara

2.15

Ablitt’s Fine Cleaners

Santa Barbara

2.25

California Cleaners

Goleta

2.25

Justo the Tailor

Santa Barbara

2.25

Pressed 4 Time

Goleta

2.50

King’s Cleaners

Goleta

2.50



a. What is the average price per shirt washed and ironed in Goleta? In Santa Barbara?

b. Draw typical marginal cost and average total cost curves for California Cleaners in Goleta, assuming it is a perfectly competitive firm but is making a profit on each shirt in the short run. Mark the short-run equilibrium point and shade the area that corresponds to the profit made by the dry cleaner.

c. Assume $2.25 is the short-run equilibrium price in Goleta. Draw a typical short-run demand and supply curve for the market. Label the equilibrium point.

d. Observing profits in the Goleta area, another dry cleaning service, Diamond Cleaners, enters the market. It charges $1.95 per shirt. What is the new average price of washing and ironing a shirt in Goleta? Illustrate the effect of entry on the average Goleta price by a shift of the short-run supply curve, the demand curve, or both.

e. Assume that California Cleaners now charges the new average price and just breaks even (that is, makes zero economic profit) at this price. Show the likely effect of the entry on your diagram in part b.




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from Krugman Wells – Microeconomics 2nd Ed. – Chapter 13 (Perfect Competition and the Supply Curve), Question 4
Bob produces DVD movies for sale, which requires a building and a machine that copies the original movie onto a DVD. Bob rents a building for $30,000 per month and rents a machine for $20,000 a month. Those are his fixed costs. His variable cost per month is given in the accompanying table.

Quantity of DVDs

Variable Cost (VC)

Total Cost (TC)

Marginal Cost of  a DVD

Average Variable Cost (AVC) of a DVD

Average Total Cost (ATC) of a DVD

0

$0

$50,000

MC=TC/Q

AVC=VC/Q

ATC=TC/Q

1,000

5,000

55,000

$5

$5

$55

2,000

8,000

58,000

3

4

29

3,000

9,000

59,000

1

3

19.67

4,000

14,000

64,000

5

3.50

16

5,000

20,000

70,000

6

4

14

6,000

33,000

83,000

13

5.50

13.83

7,000

49,000

99,000

16

7

14.14

8,000

72,000

122,000

23

9

15.25

9,000

99,000

149,000

27

11

16.56

10,000

150,000

200,000

51

15

20



a. Calculate Bob’s average variable cost, average total cost, and marginal cost for each quantity of output.

b. There is free entry into the industry, and anyone who enters will face the same costs as Bob. Suppose that currently the price of a DVD is $25. What will Bob’s profit be? Is this a long-run equilibrium? If not, what will the price of DVD movies be in the long run?













































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Part 7 - Market Structure: Beyond Perfect Competition

Chapter 14 - Monopoly 


Chapter 15 - Oligopoly 


Chapter 16 - Monopolistic Competition and Product Differentiation 











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