Assignment 3 _answers_.docx

  • December 3, 2020

NEW YORK UNIVERSITY

SCHOOL OF CONTINUING AND PROFESSIONAL STUDIES

Fall 2016

Principles of Microeconomics

ECON1-UC0302

Assignment 3

Please do questions 4 and 6 from chapter 8 of Hall and Lieberman.  The assignment is due on 10/18/2016 in class.

QUESTION 4:

The profit-maximizing level of output is 14. As the firm chooses to produce the 11th, 12th and 13th unit MR>MC so it is clear that they should continue to increase their quantity and thereby increase profits. As the firm considers the production of the 14th unit they see that MR=MC, i.e. they cannot make any additional profit by producing the 14th unit. Hence, we deduce that the firm is indifferent between producing 13 or 14 units because their overall profit is the same. They would definitely not produce the 15th unit as MR<MC, which indicates that they would earn negative profit on the 15th unit, or equivalently that their overall profit would be lower if they produced 15 units than if they produced 14.

QUESTION 6:

            If the firm’s fixed costs are $3,000 per day, then its variable costs are $7,000 – $3,000 = $4,000 per day.

            a. Since its total revenue is less than this amount, this firm should shut down in the short run.

b.   Since the firm is earning enough total revenue to cover these variable costs, it should continue to operate in the short run.

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