Economics 384 Homework #4 Name ________________________

30 Points

1. 8 Points

Assume you own a computer shop and that you sell 2,000 computers a year. The selling price of the computers is $900 in a perfectly competitive market. Assume your ATC is $1,000 and that your AVC is $800 while your AFC is $200. Should you continue to produce in the short run or shutdown? Explain your answer including how much money you lose if you produce vs. how much you lose if you shutdown.

2. 5 Points

Assume a self-service gas station has the following marginal cost function and that gasoline sells for $3.00 per gallon.

MC = $1.25 +.00002Q (where Q is the number of gallons of gasoline sold.)

Assume the only variable cost for this firm is the gasoline. What is the amount of gasoline this firm should sell in order to maximize profits? Show calculations.

3. 5 Points

Next assume the gas station’s marginal cost function has changed as shown below, and the price of gasoline has decreased to $2.50 per gallon.

MC = $1.50 +.00002Q (where Q is the number of gallons of gasoline sold.)

Assume the only variable cost for this firm is the gasoline. Calculate the amount of gasoline this firm should sell in order to maximize profits? Show Calculations.

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4. 12 Points

Beth’s Lawn Mowing Service is a small business that acts as a price taker; therefore: MR = P

The prevailing market price of lawn mowing is $20 per acre.

Her total and marginal cost functions are:

TC = .1Q²+ 10Q + 50

MC = .2Q + 10

a) How many acres should Beth choose to mow if she wants to maximize profits? Show calculations.

b) Calculate the amount of profit for this period. Show calculations.