MBAA 523 Advanced Aviation Economics – Problem Set 5

MBAA 523 Problem Set 5 r4-16



1.       For each of the following market structure characteristics, insert the correct Market Type(s).  There may be more than one.  Use these abbreviations:  PC – perfect competition; MC – monopolistic competition; and M – monopoly.




Market Structure Characteristic Market Type
Advertising is not effective for the individual firm.  
The seller is a price-taker.  
Neither an individual buyer nor seller can affect the market demand and supply curves.  
Long-run economic profits are possible.  
In long run equilibrium, each supplier produces where SRATC and LRATC are at a minimum.  
Advertising is used extensively.  
In equilibrium, P = MR = MC.  
Product is unique.  
In equilibrium, products cannot be produced at a lower cost or sold at lower price.  
Economies of scale are often a barrier to entry.  
Products have many close substitutes.  




2.       Assume a perfectly competitive market structure.  Complete the diagram to show the profit maximizing price and quantity.  Label each (use Insert textbox).


a.       Is the firm earning economic profits or losses?


b.       What should the firm do in the short run?


c.       In the long run, what changes should be anticipated in this market?















3.   A firm sells its product in a perfectly competitive market where other firms charge a price of $80 per unit.  The firm’s costs are C(Q) = 40 + 8Q + 2Q2.  Show your computations.


a. What price should the firm charge in the short-run?


b. What is the marginal cost (show computation)?


c. How much output should the firm produce in the short-run?




d. What are the firm’s short-run profits?


e. In the long run, what adjustments should be anticipated in this market?




4.       Complete the diagram showing the profit maximizing price and quantity.  Label each.  Show and label the deadweight loss (In MS Word, use Insert/Curved Connector, a curved line).





5.       A firm is a monopoly with demand and cost functions given by P = 200 – 2Q and C(Q) = 2,000 + 3Q2 respectively.  Show your computations.


a. Show the equations for MR and MC.


b. Compute the profit maximizing quantity.


c. What is the price at the profit maximizing quantity?


d. Compute total revenue.


e. Compute total cost.


f. What are the profits?