# Problem 1: Robert’s New Way Vacuum Cleaner Company ...Problem 2: Greener Grass Company (GGC) ...

Aug 2nd, 2016
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Problem 1: Robert’s New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 – 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2. Problem 2: Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year, GGC’s price for the typical lawn system was \$1,900 compared with BLG’s price of \$2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.) GGC has substantial excess

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15Please complete the following two applied problems:Problem 1:Roberts New Way Vacuum Cleaner Company is a newly started small business that producesvacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for theproduct is expressed as Q = 5000 25P where Q is the number of vacuum cleaners per year andP is in dollars. Cost estimation processes have determined that the firms cost function isrepresented by TC = 1500 + 20Q + 0.02Q2.Show all of your calculations and processes. Describe your answer for each question in completesentences, whenever it is necessary.1. What are the profit-maximizing price and output levels? Explain them and calculate algebraicallyfor equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR(marginal revenue) curves graphically and illustrate the equilibrium point.2. How much economic profit do you expect that Roberts company will make in the first year?3. Do you expect this economic profit level to continue in subsequent years? Why or why not?Problem 2:Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in thesupply and installation of in-ground lawn watering systems in the wealthy western suburbs of a majoreast-coast city. Last year, GGCs price for the typical lawn system was \$1,900 compared with BLGs priceof \$2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt

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