Question

SECTION ONE: 2 points a) There are three companies, Alpha, Beta, and Delta who have the following data. Alpha TR=$1.5m TC= $1.0m Beta TR=$1.1m. TC= $1.0m Delta TR=$1.0m TC= $1.0m There is an increase in the price of oil such that each company sees an Increase in cost of $100,000. Please state the profit (or loss) of each company now and explain each. b) Explain what happens to each company in the short-run. c) Explain what happens to each company in the long-run. SECTION TWO: 2 points Provide a short answer to each of the following: (Show all work) a) What is the HHI given the following information..... There are 4 companies in a certain market and they have the following market share...30%, 20%, 10% 5%. b) Is the above market competitive or concentrated? Explain. c) When average product is at its highest, what is true of AVC? d) In figure 11.4, why is TVC getting closer to TC as output increases? SECTION THREE: 1 point a) Campus Sweaters has one worker and one machine and then adds one more worker and one more machines and output rises from 20 units a day to 50 units a day. Is Campus Sweaters making a short-run or long-run decision to add input? Explain.

Answer 1

Section 1

a) After the increase in the cost of oil

Alpha    TR = $1.5m   TC = $1.1m   Profit = $0.4m

Beta    TR = $1.1m TC = $1.1m   No Profit/No Loss

Delta     TR = $1.0m   TC = $1.1m   Loss = $0.1m

b) Alpha, Beta and Delta firms will continue to operate in the short run. Delta firm will continue to operate in the short run if it can recover its variable costs from the revenue it earns. If its revenue is not enough to cover the firm's variable cost it will have to shut down its operation.

c) In the long run, the loss-making company Delta will have to leave the market, only Beta, the company making normal profit and Alpha, the company making a supernormal profit will continue to operate.

Section 2

a) HHI = s₁² + s₂² + s₃²+ s₄²

        = 30²+20²+10²+5²

         = 900 + 400 + 100 + 25

       = 1425

b) The above market is not fully concentrated nor perfectly competitive. In a perfectly competitive market, the HHI approaches 0. In a monopoly, HHI is 10000, as a single firm has 100% market share. HHI for a monopoly is 100² = 10000

c) When the average product is at its highest, the average variable cost is at its lowest.

AP MP variable Input units MC 1 AVC Qutput O Cost Product

d0 TVC sneaks closer to TC at the end. As output becomes larger, fixed cost becomes less important (as it stays constant and does not grow with the output). Therefore, in the end, TVC sneaks closer to TC.

Section 3

a) Campus Sweaters is making a long-run decision to add inputs. In the short-run, only variable inputs such as workers are changed. In the long run, the fixed inputs such as a machine can be added into the input.

b) The firm is operating at the beginning of the Long-run Average Cost (LAC) curve, which gives increasing returns to scale. Due to increasing returns to scale doubling the inputs resulted in an output that was more than double.

LRAC 1 1 Constant rutiurns ecreasing returns t scale Inereading to scale returns ta seale Cost ()

c) The MC and the AVC decide the profit maximising level of output in the short run. The profit maximising level of output is at the point where MC cuts AVC from below. This is also the lowest point of AVC.

d) The short-run choice for Campus Sweater is to shut down its business. As its revenue is unable to cover its variable cost of operation, it will be unable to continue production.