Answers: Assignment 5

Econ. 103, Fall 2002, Prof. Nancy Folbre

1. As shown in the following table, Volvo’s greater production volume gives it substantially lower average production cost, and this advantage helps explain why Volvo’s market share has in fact been growing relative to Saab’s.

	Saab	Volvo
annual production	50,000	200,000
fixed cost	1,000,000,000	1,000,000,000
variable cost	500,000,000	2,000,000,000
total cost	1,500,000,000	3,000,000,000
average cost per car	30,000	15,000

7. To answer this question, it’s helpful to have a table of George’s total and marginal revenue:

Customer	Reservation price	Total revenue	Marginal revenue
A	50	50	50
B	46	92	42
C	42	126	34
D	38	152	26
E	34	170	18
F	30	180	10
G	26	182	2
H	22	176	-6

Since marginal cost =$12, George will set a price consistent with serving only the first five customers. That price is the reservation price of the fifth customer (E), $34. His profit will be $170 -$60 or $10 per day.

7b. The consumer surplus= (50+46+42+38+34)-170, or $40 per day.

7c. The socially efficient number is 8, since each customer has a reservation price that exceeds the marginal cost of production.

7d. George will produce 8 portraits, and his economic profit will be $(50+....+22)-96, or $192 per day.

7e. No consumer surplus will be generated.

7f. The ability to offer a rebate coupon allows George to divide his market into two sub=-markets. George should set the price at $34 and sell 5 photos per day in this market. The discount price should be $22; George should sell three photos in this market.

7g. George’s economic profit is now $34 (5) + 22(3) -96, or $140. The consumer surplus is (50+46+42+38+34)-170, plus (30+26+22)-66, or $52.

8a. The marginal revenue curves are 12-4Q, 8-6Q and 10-8Q, respectively.

8b. The Michigan Cinema should set marginal revenue equal to marginal cost in each market. The resulting quantities in each market are 250, 100, and 100, respectively. The corresponding prices are $7 for adults on Saturday night, $5 for children on Sunday afternoon, and $6 or adults on Sunday afternoon.