- a. The profit associated with an electronic control device (ECD) is E
1,500 [500 (2)(300)] $400. If the firm sells the two microchips
separately (instead of putting them into an ECD), its total profit is M
(550 300)(2) $500. Thus, the firm should devote all of its
capacity to the production of microchips for direct sale. Producing
ECDs is not profitable.
b. If there is unused microchip capacity, the firm earns $400 in additional
profit for each ECD sold. Producing ECDs now becomes profitable.
c. If $200 (of the $500 average cost) is fixed, each ECD’s contribution
becomes E1,500 [300 (2)(300)] $600. The firm should
produce ECDs in the short run; this is more profitable than selling
chips directly. - a. Setting MR MC implies 10,000 400Q $4,000. Thus, Q* 15
games.
b. The contribution is R VC ($150,000 45,000) ($4,000)(15)
$45,000. The opportunity cost of the entrepreneur’s labor is $20,000,
and the required annual return on the $100,000 investment is 20
percent or $20,000. Thus, her economic profit is $45,000 20,000
20,000 $5,000. - a. To maximize profit set MR MC. Therefore, 10 .5w 5, or w 10
weeks. Profit from the film is: [(10)(10) .25(10)^2 ] (5)(10) 75
50 $25 thousand.
b. The “total” marginal cost (including the opportunity cost of lost
profit) of showing the hit an extra week is 5 1.5 $6.5 thousand.
Setting MR MC 6.5 implies: w 7 weeks.
c. On the cost side, there are economies of scale and scope. (With
shared fixed costs, 10 screens under one roof are much cheaper than
10 separate theaters.) Demand economies due to increased variety
probably also exist. Filmgoers will visit your screens knowing that
there’s likely to be a movie to their liking.
d. Obviously, video rentals and sales compete with (and potentially
cannibalize) theater revenues. The delay makes sense as long as the
extra theater profits from extending the run exceed the video profits
given up. - a. Given the cost function C 360 40Q 10Q^2 , it follows that AC
360/Q 40 10Q. Clearly, average cost is U-shaped.
b. To find the point of minimum average cost, set AC MC: 360/Q
40 10Q 40 20Q. Thus, 360/Q 10Q or Q^2 36. Therefore,
Qmin6 units and ACmin360/6 40 (10)(6) $160 per unit.
c. Because ACminexceeds the market price (P $140), the firm incurs
losses if it operates. In the long run, it will shut down.
10 Answers to Odd-Numbered ProblemsBMAns.qxd 9/26/11 11:18 AM Page 10