Homework-2

Principles of Microeconomics Econ 160

Instructor: Dr. Amarendra Sharma Maximum Score: 100
Instructions: Answer all questions. Type your answers using a word processor and save as a pdf file and
then upload your answer file in the Brightspace before the deadline. Diagrams, if necessary, can be hand
drawn and scanned and then inserted into the answer file at the appropriate space. Each question is worth
10 points.
Deadline: April 28, 2023 (11:59 pm)

1. In 2011, Toni taught music and earned $20,000. She also earned $4,000 by renting out her basement.
On January 1, 2012, she quit teaching, stopped renting out her basement, and began to use it as the
office for her new Web site design business. She took $2,000 from her savings account to buy a
computer. During 2012, she paid $1,500 for the lease of a Web server and $1,750 for high-speed
Internet service. She received a total revenue from Web site designing of $45,000 and earned interest
at 5 percent a year on her savings account balance. Normal profit is $55,000 a year. At the end of
2012, Toni could have sold her computer for $500. Calculate Toni’s opportunity cost of production
and her economic profit in 2012.

Use the following data to work Problems 2 and 3.

Four methods of completing a tax return and the time taken by each method are: with a PC, 1 hour;
with a pocket calculator, 12 hours; with a pocket calculator and paper and pencil, 12 hours; and
with a pencil and paper, 16 hours. The PC and its software cost $1,000, the pocket calculator costs
$10, and the pencil and paper cost $1.
2. Which, if any, of the methods is technologically efficient?
3. Which method is economically efficient if the wage rate is
(i) $5 an hour?
(ii) $50 an hour?
(iii) $500 an hour?
4. Market shares of chocolate makers are in the table.

Market share
Calculate the Herfindahl-Hirschman Index. What is the Firm (percent)
structure of the chocolate industry? Truffles, Inc. 25
Magic, Inc. 20
Mayfair, Inc. 15
All Natural, Inc. 15
Gold, Inc. 15
Bond, Inc. 10

5. Bill’s Bakery has a fire and Bill loses some of his cost data. The bits of paper that he recovers after
the fire provide the information in the following table (all the cost numbers are dollars).
Bill asks you to come to his rescue and provide the missing data in the five spaces identified as A,

1
 B, C, D, and E.

TP AFC AVC ATC MC

10 120 100 220
80
20 A B 150
90
30 40 90 130
130
40 30 C D
E
50 24 108 132

Use the following information to

work Problem 6. Labor Output
The table shows the production (workers (rides per day)
function of Bonnie’s Balloon per day) Plant 1 Plant 2 Plant 3 Plant 4
Rides. Bonnie’s pays $500 a day 10 6 10 13 15
for each balloon it rents and $25 20 10 15 18 20
a day for each balloon operator it 30 13 18 22 24
hires. 40 15 20 24 26
50 16 21 25 27
Balloons 1 2 3 4

6.a. Graph the ATC curves for Plant 1 and Plant 2. Explain why these ATC curves differ.
6.b. Graph the ATC curves for Plant 3 and Plant 4. Explain why these ATC curves differ.
6.c. On Bonnie’s LRAC curve, what is the average cost of producing 15 rides and 18 rides a day?
6.d. Explain how Bonnie’s uses its long-run average cost curve to decide how many balloons to rent.

7. The market for smoothies is perfectly competitive and the market demand schedule is in the first table.
Each of the 100 producers of smoothies has the costs given in the second table when it uses its least-cost
plant.

Price Quantity demanded

7.a.What is the market price of a smoothie? (dollars per smoothie) (smoothies per hour)
7.b. What is the market quantity of smoothies? 1.90 1,000
7.c. How many smoothies does each firm sell? 2.00 950
2.20 800
2.91 700
7.d. What is the economic profit made or 4.25 550
economic loss incurred by each firm? 5.25 400
5.50 300

2
 Output Marginal cost Average Average
(smoothies (dollars per variable total cost
per hour) additional smoothie) cost
(dollars per smoothie)
3 2.50 4.00 7.33
4 2.20 3.53 6.03
5 1.90 3.24 5.24
6 2.00 3.00 4.67
7 2.91 2.91 4.34
8 4.25 3.00 4.25
9 8.00 3.33 4.44

Use the following information to work Problems 8 to 10.

Price Quantity Total cost
Hot Air Balloon Rides is a single-price monopoly. (dollars demanded (dollars
Columns 1 and 2 of the table set out the market demand per ride) (rides per month) per month)
schedule and columns 2 and 3 set out the total cost 220 0 80
schedule. 200 1 160
8. Construct Hot Air’s total revenue and marginal 180 2 260
revenue schedules. 160 3 380
140 4 520
9. Draw a graph of the market demand curve and 120 5 680
Hot Air’s marginal revenue curve.
10. Find Hot Air’s profit-maximizing output and price and calculate the firm’s economic profit.