Suppose a firm that manufactures bicycles has the following cost structure:

a. How mu does this firm have in fixed costs?

b. Using graph paper or a computer program, graph the total cost curve for this firm. Suppose that bicycles sell for $200 each, and the firm is a price taker. Create a table showing the marginal cost, total cost, marginal revenue, total revenue (price × quantity), and total profit (total revenue – total cost) at each level of production.

c. Add a total revenue curve to the graph that you created in (b). Indicate with arrows the approximate quantity at which the vertical distance between the two curves is the greatest.

d. Would the firm make a profit by producing and selling only one bicycle? Would one bicycle be the best output level for the firm? What is the output level that maximizes profits?

Suppose that a seller in a duopoly needs to decide whether to spend a lot or a little on advertising. Assume that the consumers are already reasonably well informed about the product, so the purpose of a lot of advertising is to draw customers away from the rival. How could the payoffs from this situation resemble those in Figure 17.6? Draw a payoff matrix illustrating this case (with options “spend a lot” or “spend a little” and outcomes of low, moderate, or high profits) and describe the noncooperative solution. What if the government decided to ban advertising in this industry (as it has, in the past, banned advertising of cigarettes and alcohol in various media)? Would that help or hurt the companies’ profits?