Price of fossils ($) Number of fossils supplied per day ,

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1 Chapter : Answers to roblems 1. If the price of a fossil is less than $, Zoe should devote all her time to photography because when the price is, say, $5 per fossil, an hour spent looking for fossils will give her 5($5) = $5, or $ less than she d earn doing photography. If the price of fossils is, Zoe should spend one hour searching, will supply 5 fossils, and will get $30 revenue, which is $3 more than she d earn from photography. However, an additional hour would yield only additional fossils or $ additional revenue, so she should not spend any further time looking for fossils. If the price of fossils rises to $7, however, the additional hour gathering fossils would yield an additional $8, so gathering fossils during that hour would then be the best choice, and Zoe would therefore supply 9 fossils per day. Using this reasoning, we can derive a price-quantity supplied relationship for fossils as follows: rice of fossils ($) Number of fossils supplied per day , If we plot these points, we get Zoe s daily supply curve for fossils: rice ($/fossil) Number of fossils. The marginal cost of each of the first air conditioners produced each day is less than $10, but the marginal cost of the 7 th air conditioner is $10. So the company should produce air conditioners per day. Air Conditioners/day Total Cost

2 a. As indicated by the entries in the last column of the table below, the profitmaximizing quantity of bats for aducah is 0/day, which yields daily profit of $35. b. Same quantity as in part a, but now profit is $5, or $30 more than before. (bats/day) Total Revenue Total labor cost Total cost rofit. A tax of $10 per day would decrease aducah s profit by $10 per day at every level of output. But the company would still maximize its profit by producing 0 bats per day. A tax that is independent of output does not change marginal cost, and hence does not change the profit-maximizing level of output. But a tax of $ per bat has exactly the same effect as any other $ increase in the marginal cost of making each bat. As we see in the last column of the table below, the company s profit-maximizing level of output now falls to 15 bats per day. At that level it earns exactly 0 profit, but at any other level of output it would sustain a loss. (bats/day) Total Revenue Total labor cost Total cost rofit roducer surplus is the area of the shaded triangle, $18,000/day.

3 rice ($ per slice) Supply 3 Demand 1 uantity (1000s of slices per day). The market supply curve (right) is the horizontal summation of the supply curves of the individual market participants (left and center). = 1 =+ S Horizontal summation means holding price fixed and adding the corresponding quantities. If you want to derive the market supply curve algebraically, solve each individual supply curve for quantity and add. ay careful attention to the region for which the supply curves don't overlap (here, the region <). From = 1, get 1= /; from = +, get = -. For the region <, the market supply is the same as firm 1's supply = /, or =. For > we add 1 + to get = / + (-), which reduces to = (3/) -. Rewriting this, we have = (/3) + (/3) for >. Expressed algebraically, the market supply curve is thus = for < and = (/3) + (/3) for >. 7. This firm will sell 570 slices per day, the quantity for which =. Its profit will be (-)x = ($.50/slice - $1.0/slice)x(570 ) = $7/day.

4 $/slice This firm will sell 30 slices per day, the quantity for which =. Its profit will be (-)x = ($0.80/slice - $1.03/slice)x(30 ) = -$8.80/day. $/slice Because price is less than the minimum value of, this producer will shut down in the short run. He will thus experience a loss equal to his fixed cost. Fixed cost is the difference between total cost and total variable cost. For = 0, we know both and, so for that output level we can calculate TC = (0 )($1.18/slice) = $30.80/day and VC = (0 )($0.8/slice) = $17.80/day. So fixed cost = $30.80/day - $17.80/day = $130/day. This producer s profit is thus -$130.day.

5 $/slice This producer will sell 35 slices per day, the quantity for which =. His total revenue will therefore be x = ($1.18/slice)x(35 ) = $513.30/day. His variable cost is x = ($0.77/slice)(35 ) = $33.95/day. To this we add his fixed cost of $130/day to obtain TC = $.95/day (calculated using the method shown in problem 9). So this producer s profit is $513.30/day - $.95/day = $8.35/day. $/slice