Question

SHORT ANSWER SECTION (30 points): 1) Suppose a baker can produce cakes with the cost structure below. Complete the table. (Hint/suggestion: Start with fixed costs. Use algebra to fill in the rest. Hint #2: Marginal means change. Average means cost per unit) Number of Cakes VC MC AVC FCTC ATC 50 50 155 Circle the correct answer: The time horizon for the above example is (short run; long run). Suppose the above costs apply to a competitive firm selling cakes for $20/cake. Fill in the blank: How many cakes should this firm sell? 2) A) Draw a supply and demand diagram showing a tariff. Clearly label the tariff and the equilibrium. Using letters or shading, show the consumer and producer surplus, and the deadweight loss.

Answer 1

IN vc mc arc FC 0 0 - 0 So II 30 30 30 So 12 50 20 25 so 3 75 25 25 so Tu 105 30 26.25 50 TC so 80 100 125 155 ATC - 80 50 41.67 38.7

TC=FC+VC

VC=AVC*Q

VC=TC-FC

ATC =TC/Q

MC=∆TC/∆Q

A competitive firm is in equilibrium when P=MC

P=MC at Q3 units.

Answer-2 units

2.

Supply curve shifts to the left by the amount of tariff

S + Tax consumer surplus Dead weight welfare loss Tax Revenue producer surplus