1NA050 - Cost Theory and Market Analysis. Autumn 2019

1NA050 – Cost theory and market analysis.
Autumn 2019
Unless otherwise stated, it is assumed that the following exercises have a SHORT-RUN
application, i.e., there are both variable and fixed factors of production.
1) Complete the following table.
Q TFC TVC TC AVC ATC MC

0 120
1 90
2 170
3 240
2) Suppose that the market for cotton shorts is a perfect competitive market. A
typical company on the market has the following cost structure:
Output (per week) ATC AVC MC

100 101 36 24
200 58 28 12
300 43 21 10
400 36 20 20
500 35 22 35
600 37 26 58
700 41 32 82
a) Illustrate with a figure the company’s short-term supply curve. Also, show the
position of the “break even” and the “shutdown point”. Explain.
b) Suppose the company is one of 100 identical companies on the market. Show the
short-term market supply curve.
c) Suppose the market demand looks as follows:
Price Quantity demand (per week)

74 40 000
66 50 000
58 60 000
50 70 000
45 80 000
40 90 000
35 100 000
What is the short-term market price? How large is the profit-maximizing

quantity for each and every producer? What are their profits?
d) Discuss a plausible long-term development on this market. Assume in your
argumentation that the demand curve looks as in c) above, and that the cost
structure presented is the one obtained for a company size corresponding to the
minimum level for long-term average costs. What is a plausible long-term price?
What quantity will then be produced by each company? What quantity will the
market at large produce? How many companies will there then be on the
market?
3) Assume that due to special production circumstances there are only two factory
sizes that a company can use. Each factory can produce a maximum of 500 000
units per year.
The total annual costs for Factory A are calculated as follows:

TCA = 500 000 + 5Q, where Q represents quantity produced.
The equivalent for Factory B is:

TCB = 1 000 000 + 3Q.
Show the company’s long-term average costs in a graph.
Which factory, A or B, would be chosen if the expected sales would be either

125 000 or 375 000 units? Motivate your answer.
4) Suppose that in one country the agricultural market is unregulated, i.e., the prices
are determined in the interaction between supply and demand in a perfect
competitive market. Suppose further that this country discovers a very
inexpensive way of producing alcohol from cereals, which can be used as a
substitute for petrol. Explain what will happen to the production of cereals, to
the price of cereals, and to farmers’ incomes. Distinguish between short-run and
long-run effects in your answer. Account for the conditions forming the basis of
your conclusions.
5) The following refers to one industry and suppose it can be characterized as a

perfect competitive market:
Demand P = 75 – 0.5Qd
Supply P = 8 + 2Qs
a) Calculate equilibrium price and equilibrium quantity.

b) Calculate the price elasticity of demand at the equilibrium.
c) The government introduces a tax of 6 SEK/unit. How will this affect the
equilibrium price and the equilibrium quantity? Calculate.
6) Explain by using a market’s long-run cost curves why
a) Personal computers have become less expensive, relatively speaking, at the
same time as there has been a huge increase of the turnover;
b) Shrimps have become relatively more expensive at the same time as there has
been only a slight increase of the turnover.
7) In a market where the producer is a monopolist, there is the following connection

between market price and quantity demand:
Price Quantity TR MR
12 0
11 1
10 2
9 3
8 4
7 5
6 6
5 7
4 8
3 9
2 10
1 11
0 12
Define the concepts of total revenue, TR, and marginal revenue, MR, calculate
these and insert them into the above table as well as explaining the two
concepts and what lies behind the difference arising between them.
8) This is what applies to a monopolist:
MC = 2 MC = Marginal cost in SEK

P = 22 – 2Qd Q = Quantity of units
MR = 22 – 4Q P = Price per unit in SEK
a) Calculate the profit maximizing price and quantity. Calculate and solve
graphically.
b) How large is the price elasticity of demand at the profit maximizing solution?
c) At what is the profit maximizing quantity if a per-unit tax of 1 SEK is introduced
on the product?
9) On a certain market the following connection between demand and supply has
been arrived at. The supply applies both in the case of perfect competition as
when representing the marginal cost (i.e. the supply) in the monopoly case.
Demand P = 80 – 1,5Qd
Supply P = 10 + 0,5Qs
Marginal revenue MR = 80 – 3Q
a) Calculate price and quantity if the market is working as a perfect competitive

market.
b) Calculate price and quantity if the market is to be regarded as a monopoly
market.
c) Compare the monopoly solution and the prefect competitive solution with
regard to welfare effects, productivity, and resource distribution.
10) A market is characterized as monopolistic competition. For one company these

connections between supply and demand apply in the short run:
Pris P MR
5
kostnad
ATC
MC
f
P
4
P
3
d
h
P
2
b
P
1
P
D
0
Q Q Q
1 2 Kvantitet
a) Show the profit-maximizing quantity and price in the figure.

b) Show the total profit in the figure?
c) If the company starts an advertising campaign which immediately produces
good results, how will this affect the different graph curves?
d) Discuss the long-term changes of the different graph curves.
e) Discuss the difference between monopolistic competition and a perfect
competitive market with regard to resource utilization, costs and profits.
f) What specific market behaviour characterizes a monopolistic competitive
market?

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1NA050 – Cost theory and market analysis.

1) Complete the following table.

Q TFC TVC TC AVC ATC MC

Output (per week) ATC AVC MC

Price Quantity demand (per week)

What is the short-term market price? How large is the profit-maximizing

The total annual costs for Factory A are calculated as follows:

The equivalent for Factory B is:

Show the company’s long-term average costs in a graph.

Which factory, A or B, would be chosen if the expected sales would be either

5) The following refers to one industry and suppose it can be characterized as a

a) Calculate equilibrium price and equilibrium quantity.

7) In a market where the producer is a monopolist, there is the following connection

8) This is what applies to a monopolist:

MC = 2 MC = Marginal cost in SEK

a) Calculate price and quantity if the market is working as a perfect competitive

10) A market is characterized as monopolistic competition. For one company these

a) Show the profit-maximizing quantity and price in the figure.

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