Chapter 9

Cool-Aire Corporation manufactures a line of room air conditioners. Its breakeven sales level is 33,000 units. Sales are approximately normally distributed. Expected sales next year are 38,000 with a standard deviation of 3000 units. (3 points)

a)      Determine the probability that Cool-Aire will incur an operating loss (Hint: Find your Z statistic first and then refer to the Z table.)

b)      Determine the probability that Cool-Aire will operate above its breakeven point. (Hint: The probability of operating above breakeven is one minus your answer above.)

Chapter 10

1.      Assume that a firm in a perfectly competitive industry has the following total cost schedule: (3 points)

a)      Calculate the average and marginal costs for the firm.

b)      At a market price of $15 per unit, how many units will be produced and sold? What is the profit per unit? What is total profit?

c)      Is the industry in long run equilibrium at this price? Why or why not?

2.      The Poster Bed Company believes that its industry can best be classified as monopolistically competitive. An analysis of the demand for its canopy bed has resulted in the following estimated  demand function (P), inverse demand function (Q), total revenue function (TR), and marginal revenue function (MR): (6 points)

P = 910 – 6Q   è  Q = 151.67 – .167P

TR = 910Q -6Q²

MR = 910 – 12Q

The cost analysis department has estimated the total cost function (TC) and the marginal cost function (MC) for the poster bed as:

TC = 30Q² + 10Q + 2000

MC = 60Q + 10

a)      Calculate the level of output that should be produced to maximize short run profits.

(Hint: Set MR = MC and solve for Q) (2 points)

b)      What price should be charged? (1 point)

c)      Compute total profit at this price – output combination. (1 point)

d)      Compute the point price elasticity of demand at the profit-maximizing level of output.   (2 points)