ECON 111: MICROECONOMICS PRINCIPLES ESSAY TEST Scenario 1:

Tran Ha Nhi opens a milktea shop. Her only fixed cost is the machine that she bought at $100. Her variable cost consists of the wages paid to the cashiers and the ingredients. The variable cost associated with each level of output is given below. The milktea market can be considered perfectly competitive.

Q VC ($) 0 0 10 200 20 300 30 480 40 700 50 1,000

a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output. (1.5)

b. At what price will Tran Ha Nhi shut down her milktea shop? (1)

c. Suppose that the price of milktea on this market is $17. With this price, in the short run, will Tran Ha Nhi earn a profit? In the short run, should she produce or shut down? (1)

Scenario 2 - Image above shows a behavior of a monopolistically competitive firm. Answer and explain the following:

If this firm profit-maximizes, how much output will it produce? (0.5) If this firm profit-maximizes, what price will it charge? (0.5) When this firm profit­-maximizes, what is the amount of the firm’s profit or loss? (1) What, if any, long run adjustment will take place in this industry? (1) Only answers with explanations will be accepted.

Scenario 3: Highland Coffee and Azzan are the only two coffee shops that are operating on FPT Campus in Hanoi. Although there might be some difference, coffee from these two coffee shops can be considered largely the same. Both Azzan and Highlands are considering whether to give promotions for their products by offering different types of coupons, which essentially reduce the price for their products.

Highland Coffee without promotion is: 50,000 VND/ cup Highland Coffee with promotion is 40,000 VND/cup Azzan Coffee without promotion is: 35,000 VND/cup Azzan Coffee with promotion is: 30,000 VND/cup

The following table represents the “game” played between these two coffee shops in the FPT Campus market. The revenue in each firm (million VND/day) is given in the table as (Azzan, Highland coffee):

Highland Coffee

Promotion Without promotion Azzan Promotion (5, 10) (10, 13) Without promotion (8, 14) (13, 12)

Which type of market structure does these two coffee shops belong to? (0.5) Which firm has dominant strategy? (0.5) Find the Nash equilibrium/equilibria. (0.5) If Azzan do not have any promotion, discuss the price elasticity of demand for coffee from Highland. (1) Discuss the elasticity of demand for coffee from Azzan (1)