Problem Set 3

1.	Decide whether each of the following is true or false, and briefly explain your decision:
	a.	If a firm is earning zero economic profit, then it should exit from the industry to minimize its losses.
	b.	If a firm is earning zero accounting profit, then it should exit from the industry to minimize its losses.

2.	Suppose that when you first entered college, you barely considered your expected benefits of a college education to exceed your expected costs. Suppose that halfway through college, you realize(d) that your expected benefits are only about two-thirds of what you had originally estimated. Should you drop out of college or go ahead and finish? Explain your reasoning.

3.	Jaynie owns a small shop and produces dining room sets.
	a.	Complete the following partially completed table of production cost information:
		Output Q Total cost TC Total fixed cost TFC Total variable cost TVC Average total cost ATC Average variable cost AVC Marginal cost MC 0 $150     --- --- --- 1 232           2 300           3 360           4 424           5 498           6 588           7 700           8 840           9 1,014           10 1,228
	b.	Plot Jaynie's marginal cost, average total cost and average variable cost curves in a well-labeled diagram.
	c.	Use the following table to fill in Jaynie's supply schedule and list her profits at each price level (hint: keep the shutdown condition in mind).
		Price Quantity supplied Profit $174     140     112     90     74     64     60
	d.	In your diagram from part b, depict Jaynie's short-run market equilibrium for a market price of $140. Indicate where Jaynie's profits or losses show up in your diagram.

4.	The information below pertains to a perfectly competitive firm:
		P TR TVC Q ATC TC MR MC Profit $8 $8000 $7000   $8     $8
	a.	Fill in the missing information in the table.
	b.	Suppose the government decides to charge the firm an annual license fee of $600. In the short run, how will the firm adjust its output in response to the licensing fee? Explain briefly.

5.	Suppose you own a hotel at a ski resort. The lefthand panel of the diagram below depicts the market supply of rooms and the demand for rooms in the winter (W), spring (SP), summer (SU) and fall (F). The righthand panel depicts your unit costs per room rented; these costs are the same for each season.
	Use the diagram above to help you complete the table below. For the profits column, just indicate whether your profits for the season are positive (+), negative (-), or zero (0).
	Number of  rooms rented Profits Winter     Spring     Summer     Fall

6.	This problem makes use of the Econ.102 computer exercise number 3, "Firm theory: the geometry of revenue, costs, and profits." Start the program, click "Draw," and click the "Draw" row labels for each of the following: TC, TVC, MC, ATC, and AVC.
	a.	For each of the following prices:
		(1)	click "Equations" and then edit the price entered in the demand equation (the first price is already set),
		(2)	click "Draw" and then click P and TR to graph the firm's revenue situation, and
		(3)	fill in the table using approximate values (i.e., rounded to the nearest (1000).
			Over approximately what range of output is... Price TR>=TC? P>=ATC?  TR>=TVC?  P>=AVC 147         105         90         75         60
	b.	Based on your results above, at which of the above price(s) should the firm...
		(1)	remain in the industry in the short run and in the long run?
		(2)	operate now but consider exiting from the industry in the long run?
		(3)	shut down immediately?

7.	The following questions concern the compact car described in the accompanying selection, "Up and Up: Real Cost of Owning an Automobile.": For the questions, assume that the following categories of expenses are fixed costs: depreciation; insurance, fees, licenses; and interest on auto loan. Variable costs include maintenance and repairs, and gas and services.
	a.	What value for total fixed costs (TFC) per year does Hertz estimate?
	b.	Compute average fixed cost (AFC), average variable cost (AVC) and average total cost (ATC) for each of the following number of miles per year: 5,000, 10,000 and 15,000.
		Miles per year AFC AVC ATC MC 5,000         10,000 $0.3913 $0.1205 $0.5118 $0.1205 15,000
	c.	Plot your ATC and AVC values from part b in a diagram.
	d.	Suppose you own a compact car similar to the one described by Hertz, and you currently drive 10,000 miles per year. If your employer offers you the chance to do a little extra on-the-job driving at a reimbursement rate of 25 cents per mile, would it make economic sense for you to volunteer? Why or why not?

8.	Suppose that your benefits from drinking coffee at Samuelson Pavilion are reflected in the following table:
		Quantity of cups Total benefit Marginal benefit 0 $ 0  $--- 1 2.00    2 3.00    3 3.50    4 3.75    5 3.85    6 3.90    7 3.90
	a.	Complete the marginal benefit column in the table.
	b.	Plot the information in your marginal benefit column in a diagram.
	Suppose the price of coffee is $0.25 per cup.
	c.	Plot the price information in your diagram and indicate your optimum.
	d.	How large is your total benefit? Your total expenditure? Your net benefit (i.e., your consumer surplus)?
	e.	Suppose Samuelson Pavilion decided to charge you $1.10 for your first cup of coffee but then offered you free refills. How many cups would you drink? Would you prefer this to the original policy of charging $0.25 per cup? Why or why not?