# Econ 1 HW3

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```							                                           Econ 1
Assignment 3
Due on Tuesday, April 29
5 points

1. Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel
shop's average total cost (ATC) curve as a function of the number of bagels produced. The
results indicate a U-shaped average total cost curve. Bob's economist explains that ATC is U-
shaped for two reasons. The first is the existence of diminishing marginal product, which
causes it to rise. What would be the second reason? Assume that the marginal cost curve is
linear. (Hint: The second reason relates to average fixed cost)

2. At its current level of production a profit-maximizing firm in a competitive market receives
\$12.50 for each unit it produces and faces an average total cost of \$10. At the market price of
\$12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an
output level of 1,000 units. What is the firm's current profit? What is likely to occur in this
market and why?

3. List and describe the characteristics of a perfectly competitive market. Explain how a firm in
a competitive market identifies the profit-maximizing level of production. When should the
firm raise production, and when should the firm lower production?

4. Your rich uncle died and left you \$100,000, which you decided to use for your own Internet
business. What business will go into, and what will be your fixed and variable costs? Show
how your business can take advantage of economies of scale.
5. In the news…Please click on the following link to read the article and briefly answer the
discussion questions below.
http://ethemes.pearsoncmg.com/0321445635/article_09/index.html

"Caught on Film: A Growing Unease in Hollywood"

Questions:

a. If we were to think of the typical production function involving both capital and labor,
and then relate that idea to the movie industry, why have movie costs been rising?
b. As the movie industry continues to follow its blockbuster strategy, do you think it may
begin to face diseconomies of scale?
c. What could you say about the cost functions of the typical independent film company vs.
the major Hollywood studios?

```
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