Winter Semester 2025
INTRODUCTION TO ECONOMICS
PROBLEM SET 2
Problem 1
Melissa buys an iPhone for $240 and gets consumer surplus of $160.
a. What is her willingness to pay?
b. If she had bought the iPhone on sale for $180, what would her consumer surplus have been?
c. If the price of an iPhone were $500, what would her consumer surplus be?
Problem 2
A friend of yours is considering two cell phone service providers. Provider A charges $120 per
month for the service regardless of the number of phone calls made. Provider B does not have a fixed
service fee but instead charges $1 per minute for calls. Your friend’s monthly demand for minutes of
calling is given by the equation
QD = 150 − 50P
, where P is the price of a minute.
a. With each provider, what is the cost to your friend of an extra minute on the phone?
b. In light of your answer to (a), how many minutes with each provider would your friend talk on the
phone?
c. How much would she end up paying each provider every month?
d. How much consumer surplus would she obtain with each provider? (Hint: Graph the demand curve
and recall the formula for the area of a triangle).
e. Which provider would you recommend that your friend choose? Why?
Problem 3
Nimbus, Inc., makes brooms and then sells them door-to- door. Here is the relationship between
the number of workers and Nimbus’s output during a given day:
Workers Output Marginal Product Total Cost Average Total Cost Marginal Cost
0 0
1 20
2 50
3 90
4 120
5 140
6 150
7 155
a. Fill in the column of marginal products. What pattern do you see? How might you explain it?
1
b. A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to fill in the
column for total cost.
TC
c. Fill in the column for average total cost. (Recall that AT C = Q )What pattern do you see?
∆T C
d. Now fill in the column for marginal cost. (Recall that M C = ∆Q ) What pattern do you see?
e. Compare the column for marginal product with the column for marginal cost. Explain the relation-
ship.
f. Compare the column for average total cost with the column for marginal cost. Explain the relation-
ship.
Problem 4
Jane’s Juice Bar has the following cost schedules:
Quantity Variable cost ($) Total cost ($)
0 vats of juice 0 30
1 10 40
2 25 55
3 45 75
4 70 100
5 100 130
6 135 165
a. Calculate average variable cost, average total cost, and marginal cost for each quantity.
b. Graph all three curves. What is the relationship between the marginal-cost curve and the average-
total-cost curve? Between the marginal-cost curve and the average-variable cost.
Problem 5
Suppose that each firm in a competitive industry has the following costs:
Total cost:
1
T C = 50 + q 2
2
Marginal cost:
MC = q
where q is an individual firm’s quantity produced. The market demand curve for this product is
QD = 120 − P
, where P is the price and Q is the total quantity of the good. Currently, there are 9 firms in the market.
a. What is each firm’s fixed cost? What is its variable cost? Give the equation for average total cost.
b. Graph average-total-cost curve and the marginal-cost curve for q from 5 to 15. At what quantity
is average-total-cost curve at its minimum? What is marginal cost and average total cost at that
quantity?
c. Give the equation for each firm’s supply curve.
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d. Give the equation for the market supply curve for the short run in which the number of firms is
fixed.
e. What is the equilibrium price and quantity for this market in the short run?
f. In this equilibrium, how much does each firm produce? Calculate each firm’s profit or loss. Is there
incentive for firms to enter or exit?
g. In the long run with free entry and exit, what is the equilibrium price and quantity in this market?
h. In this long-run equilibrium, how much does each firm produce? How many firms are in the market?
Problem 6
A small town is served by many competing supermarkets, which have the same constant marginal
cost.
a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and
total surplus.
b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram,
show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive
market, what is the transfer from consumers to producers? What is the deadweight loss?