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ECON GU 4251: Quiz 1

Spring 2024

Answer this to the best of your ability, we do not keep track of your identity. This is to test your understanding of the class material and to provide feedback to the instructor and TA on strength and weaknesses of the class as the semester progresses. Feel free to collaborate with your peers, but beware that you may want to ensure that you would be able to answer to these questions independently.

Average cost, marginal cost, and minimum efficient scale

A firm has total cost function

TC(q) = 0.5q2 + F,

where F > 0.

a.  Derive the firm average cost curve, marginal cost curve, and minimum efficient scale.

b.  If the price isp = 10, and the firm is perfectly competitive, what is the highest fixed cost F at which

this firm will produce a positive quantity? When this is the case, how much will the firm produce?

Willingness-to-pay for quality

There are three consumers i = 1, 2, 3, each being characterized by a value of θi:

θ1  = 1;  θ2  = 2;  θ3  = 3.

A good has quality δ(> 0), and the utility for individual i when purchasing the good at price p is the familiar form

The marginal cost for the firm producing the good is constant, but also a function of quality:

MC(q) = 1.5δ2 .

a.  Compute price, quantity, and consumer surplus when δ = 1.

b.  How would quantity and consumer surplus differ if δ = 2?

c.  What about if δ = 0.5?