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Multiple-choice

1. A 2. C 3. D 4. D 5. D 6. E 7. C 8. B 9. A 10. D 11. C 12. C 13. B 14. C 15. B

Part 2
Suppose that a firm sells in a highly competitive market, in which the going price is \$15 per unit. The firms cost equation is C = \$25 + .25Q2. b) Suppose that fixed costs increase to \$75. Find the profit-maximizing level of output for the firm. Determine its level of profit. a. Profit maximizing level of output at which MR= MC 1. Revenue R= P*Q R= 15Q Marginal revenue = dR/dQ = 15 2. Total cost Marginal cost MC= dC/dQ= 0.5Q 3. MR=MC 15= 0.5Q

Q = 30 (unit) 4. at the profit maximizing level of output Q= 30, the level of output = Revenue- Cost = 15*30- (25 + 0.25*900) = \$200 b. fixed cost increases to \$75, Cost function becomes: C= 75+ 0.25Q^2 Everything else remain the same, thus MR= MC Q=30 = Revenue Cost = 15*30 (75 + 0.25*900) = \$150 2. (15 points) the college and graduate-school textbook market is one of the most profitable segments for book publishers. A best-selling accounting text published by Old School Inc (OS) has a demand curve: P = 150 - Q, where Q denotes yearly sales (in thousands) of books. (In other words, Q = 20 means 20 thousand books.) The cost of producing, handling, and shipping each additional book is about \$40, and the publisher pays a \$10 per book royalty to the author. Finally, the publishers overall marketing and promotion spending (set annually) accounts for an average cost of about \$10 per book. a) Determine OSs profit-maximizing output and price for the accounting text. b) A rival publisher has raised the price of its best-selling accounting text by \$15. One option is to exactly match this price hike and so exactly preserve your level of sales. Do you endorse this price increase? (Explain briefly why or why not.) a. profit maximizing level of output and price 1. Demand for OS Q= 150-P Revenue R =P*Q (in thousand) = 1000(150-Q)*Q Marginal revenue MR = 1000(150-2Q) 2. Cost of OS C = (40+10)*Q*1000 Marginal cost = 50*Q 3. MR= MC 150-2Q= 50 Q= 50 (thousand book) P= 150-50 = \$100 Profit = 1000(100*50-60*50) = \$2mil (Fixed cost for marketing F = 1000(10*50) = 500000 b. if the rival publisher raises its price dramatically, the firms demand curve shifts upward and to the right. The new intersection of MR and MC now occurs at a greater output.

MR = 165- 2Q MC= 50 maximize output Q = 57.5, Price = 107.5 Thus, it is incorrect to try to maintain sales via a full \$15 price hike. For instance, in the case of a parallel upward shift, P = 165 Q. Setting MR = MC, we find: MR = 165 2Q = 50, implying Q* = 57.5 thousand books, and in turn, P* = 165 57.5 = \$107.50 per book. Here, OS should increase its price by only \$7.50 (not \$15).