Microeconomics Homework: Questions and Answers with Explanations

This microeconomics assignment provides solutions to a series of multiple-choice questions and a problem related to cost functions, profit maximization, and pricing strategies. The multiple-choice questions cover topics such as fixed and marginal costs, monopolist behavior, profit maximization conditions (MR=MC), and price discrimination. The problem involves calculating the optimal quantity and price for a firm with a given marginal cost and demand schedule, determining economic profit, and analyzing the socially optimal number of books to be sold based on reservation prices. The solutions provide detailed reasoning for each answer, offering a comprehensive understanding of the underlying economic principles.

MICROECONOMICS
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Question 1: Option A
Reasoning: TC is sum of fixed cost and variable cost. Hence, from the given function is it
apparent that $300 is the fixed cost and $ 10 per unit is the variable cost. The variable cost is
also the marginal cost since it is the incremental cost incurred in the production of every
incremental unit since fixed cost remains the same.
Question 2: Option B
Reasoning: From the given demand curve, it is possible to predict the price and the
underlying quantity that the monopolist can sell at a given price. Hence, the revenue from
different combinations of price and quantity can be predicted.
Question 3: Option C
Reasoning: The profit maximisation occurs when MR=MC and hence output adjustment is
required to attain the same.
Question 4: Option C
Reasoning: The profit has been computed for all the levels where MR is greater MC and for 3
units, the profit maximisation occurs. Profit when Q =3 is 3*(8-5) = $ 9. This exceeds the
profit for any other output level.
Question 5: Option A
Reasoning: At this level, MR=MC which maximises the profit
Question 6: Option B
Reasoning: The price corresponding to quantity F is B. Also, as discussed at F output, the
profit is maximised.
Question 7: Option B
Reasoning: The price applicable is B while the quantity is F. Hence, revenue is multiplication
of price and quantity which would result in the chosen rectangle.
Question 8: Option C

Reasoning: The socially optimal level occurs where the an additional unit bring in marginal
benefit which tends to be equal to the marginal cost.
Question 9: Option C
Reasoning: As per the definition of perfect price discrimination, it is able to charge every
consumer the underlying reservation price thereby making the consumer surplus to be zero
and maximising the producer surplus.
Question 10: Option C
Reasoning: This would lead to differentiation on the part of service provider which is
rampant in case of monopolistic competition.
Question 11
a) It is known that the marginal cost is $ 10. Further, it is known that revenue is the product
of price and quantity based on which the following table can be drawn.
It is apparent that as one moves from quantity 5 to quantity 6, the MR drops to zero and then
becomes negative. At Q=5, MR>MC and hence this is the quantity that must be sold to every
consumer when a single price is charged.
b) The corresponding price to 5 units as apparent from the table indicated above is $ 36
which must be the price charged.

c) Based on the table above, it is apparent that the total revenue when 5 units are sold would
be $ 180. Also, with regards to the total cost incurred, it is known that fixed cost is zero and
hence only marginal cost would be incurred @ $10 per book. Hence, total cost = 5*10 = $50
Thus, economic profit = Total Revenue – Total Costs = 180-50 = $ 130
d) It is apparent from the given information on reservation price that for all the eight students
for whom information has been provided, the reservation price tends to exceed the marginal
cost of $ 10. Hence, the socially optimal number of books ought to be 8.