1. What is the relationship between a firm's total revenue, profit, and total cost?
2. Define economies of scale and explain why they might arise. Define diseconomies of scale and explain why they might arise.
3. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant.
a. Define opportunity cost.
b. What is your aunt's opportunity cost of running a hardware store for a year? If your aunt thinks she can sell $510,000 worth of merchandise in a year, should she open the store? Explain.
2. What are the main characteristics of a competitive market?
Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of oil rises.
a. Using diagrams, show what happens to the cost curves of an individual boat-making firm and to the market supply curve.
b. What happens to the profits of boat makers in the short run? What happens to the number of boat makers in the long run?
3. Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain.
4. Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy.
Consider the relationship between monopoly pricing and price elasticity of demand.
a. Explain why a monopolist will never produce a quantity at which the demand curve is inelastic. (Hint: If demand is inelastic and the firm raises its price, what happens to total revenue and total costs?)
b. Draw a diagram for a monopolist, precisely labeling the portion of the demand curve that is inelastic. (Hint: The answer is related to the marginal-revenue curve.)
c. On your diagram, show the quantity and price that maximize total revenue.