Assignment 2 Economics

Topics: Economics, Marginal cost, Supply and demand Pages: 3 (529 words) Published: May 15, 2011
ECO 550: Managerial Economics and Globalization

Assignment #2

1. Office building maintenance plans call for the stripping, waxing, and buffing of ceramic floor tiles. This work is contracted out to office maintenance firms, and both technology and labor requirements are very basic. Supply and demand conditions in this perfectly competitive service market are:

QS = 2P - 20| (Supply)|
QD = 80 - 2P| (Demand)|

Where Q is thousands of hours of floor reconditioning per month and P is the price per hour.

a.| Algebraically determine the market equilibrium price/output combination.| b.| Use a graph to confirm your answer. |

(For the graph, use prices: 10, 20, 30, 40, 50, 60, 70, 80, 90, and Quantities: 5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 55, 60, 65.)

2. Or Kids is a representative firm in the home grown orchid industry. The firm has a short run total cost curve given by: TC = 50 + 2q + 2q2 and a marginal cost curve given by: MC =2 + 4q. Or Kids operates in is competitive industry with the following Market Demand and Market Supply Curves:

QD = 1,410 – 40 P (Demand)
QS = -390 + 20 P (Supply)

a. What is the equilibrium price (P) and quantity (Q) in this industry? b. How many units of output (q) should Or Kids produce? (Hint: Set P= MC for the firm.) c. How much profit will Or Kids earn?

d. How many firms are in this industry? (Hint: divide the market quantity sold by the number of units the representative firm is producing.)

3. Refer to question 2 above. Suppose market conditions changed forcing the equilibrium price to $20.00. a. How much profit would Or Kids earn now?
b. Should they continue to produce in the short run? Why or why not?

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4. The figure below shows a firm in a perfectly competitive market:

a. Find the price below which the firm will go out of business. b. What is the firm’s long run...
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