Consumer Surplus, Producer Surplusjjyazar/econ110/midterm2studypacket...Consumer Surplus, Producer...
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Consumer Surplus, Producer Surplus What is willingness to pay? How does it relate to the demand curve? The willingness to pay is the maximum amount that a buyer is willing to pay for a good. In other words it is how much a buyer values a good. Points along the demand curve represent buyer’s willingness to pay or the maximum amount buyer is willing to pay. What is consumer surplus? What does it measure? Consumer surplus is the buyer’s willingness to pay minus the price, in other words it is the difference between the maximum amount the consumer was willing to pay and the amount a consumer has to pay. It measures the benefit of the consumers being able to buy goods at the market price offered rather than the maximum amount they were willing to pay. Write the formula for consumer surplus. CS = the maximum amount the consumer’s willing to pay – the actual amount consumer pays Suppose the consumer is willing to pay $20.00 for a particular good but only had to pay $14.00 for it. What is the consumer surplus? CS = $6.00 If a consumer is willing to pay $15.00 for a particular good but the price of the good is $17.00, then what would be the consumer surplus? Consumer would not purchase the good and would not have any consumer surplus. Belva is willing to pay $65.00 for a pair of shoes for a formal dance. She finds a pair at her favorite outlet shoe store for $48.00. Calculate Belva’s consumer surplus. CS = 65 – 48 = $17 Janine would be willing to pay $50 to see Les Misérables, but buys a ticket for only $30. How much does Janine values the performance? She values it $50 Denise values a stainless steel dishwasher for her new house at $500, but buys it for $350. What is Denise’s willingness to pay? $500 Nathan buys a new sound system for his dorm room for $500. He receives consumer surplus of $400 from the purchase. How much does Nathan value his sound system? $900
Transcript of Consumer Surplus, Producer Surplusjjyazar/econ110/midterm2studypacket...Consumer Surplus, Producer...
ConsumerSurplus,ProducerSurplusWhatiswillingnesstopay?Howdoesitrelatetothedemandcurve?Thewillingnesstopayisthemaximumamountthatabuyeriswillingtopayforagood.Inotherwordsitishowmuchabuyervaluesagood.Pointsalongthedemandcurverepresentbuyer’swillingnesstopayorthemaximumamountbuyeriswillingtopay.Whatisconsumersurplus?Whatdoesitmeasure?Consumersurplusisthebuyer’swillingnesstopayminustheprice,inotherwordsitisthedifferencebetweenthemaximumamounttheconsumerwaswillingtopayandtheamountaconsumerhastopay.Itmeasuresthebenefitoftheconsumersbeingabletobuygoodsatthemarketpriceofferedratherthanthemaximumamounttheywerewillingtopay.Writetheformulaforconsumersurplus.CS=themaximumamounttheconsumer’swillingtopay–theactualamountconsumerpaysSupposetheconsumeriswillingtopay$20.00foraparticulargoodbutonlyhadtopay$14.00forit.Whatistheconsumersurplus?CS=$6.00Ifaconsumeriswillingtopay$15.00foraparticulargoodbutthepriceofthegoodis$17.00,thenwhatwouldbetheconsumersurplus?Consumerwouldnotpurchasethegoodandwouldnothaveanyconsumersurplus.Belvaiswillingtopay$65.00forapairofshoesforaformaldance.Shefindsapairatherfavoriteoutletshoestorefor$48.00.CalculateBelva’sconsumersurplus.CS=65–48=$17 Janinewouldbewillingtopay$50toseeLesMisérables,butbuysaticketforonly$30.HowmuchdoesJaninevaluestheperformance?Shevaluesit$50Denisevaluesastainlesssteeldishwasherforhernewhouseat$500,butbuysitfor$350.WhatisDenise’swillingnesstopay? $500Nathanbuysanewsoundsystemforhisdormroomfor$500.Hereceivesconsumersurplusof$400fromthepurchase.HowmuchdoesNathanvaluehissoundsystem?$900
BUYER
WILLINGNESSTOPAY
MIKE
$50.00
SANDY
$30.00
JONATHAN
$20.00
HALEY
$10.00
Ifthetablerepresentsthewillingnesstopayof4buyersandthepriceoftheproductis$15,thenwhowouldbewillingtopurchasetheproduct?Mike,Sandy,andJonathanOnagraph,describehowtofindtheconsumersurplusarea.CSisthearea belowthedemandcurveandabovepriceuptoquantitypurchased.Accordingtothegraphshown,whenthepriceisP1consumersurplusisgivenbywhicharea? CS=A+B+CAccordingtothegraphshown,atthepriceofP2,consumersurplusisgivenbywhicharea?CS=AWhatdopointsalongthesupplycurverepresent?Pointsalongthesupplycurverepresentsseller’sopportunitycostofproduction.Whatistheformulaforproducersurplus? PS=Amountreceivedbysellers–Costsofsellers.Onagraph,describehowtofindtheproducersurplusarea.PSistheareaunderpriceandabovesupplyuptoquantitysold.Rogerproducescomputerboards.Hisproductioncostis$10perboard.Hesellstheboardsfor$25each.Whatishisproducersurplus?PS=25-10=$15perboard
Accordingtothegraphshown,attheequilibriumprice,whatistheconsumersurplus? CS=$480Accordingtothegraphshown,attheequilibriumprice,whatistheproducersurplus?PS=$640Accordingtothegraphshown,attheequilibriumprice,whatisthetotalsurplus?TS=CS+PS=$1,120.ThereareonlyfiveconsumersinterestedinHangover3Blueraydiscs.ThemaximumwillingnesstopayoftheseconsumersforHangover3Blueraydiscaregivenbelow:
Emily $10Carter $14Angela $16Greyson $19Jack $20
a) DrawthemarketdemandcurveforHangover3blueraydisc.
PQ201192182172163153144134124114105
b)SupposethepriceofHangover3blueraydiscis$15.Howmanyunitswouldbesold?Howmuchwouldbetheconsumersurplus?CS=$5+$4+$1=$10c)SupposethepriceofHangover3blueraydiscis$14.Howmanyunitswouldbesold?Howmuchwouldbetheconsumersurplus?CS=$6+$5+$2=$13
3)Supposethedemandandsupplycurvesfortomatoesaregivenbelow.
Calculatetheconsumersurplus,producersurplusandtotalsurplusunderfreemarketequilibrium.CS=6x600x0.5=$1,800 PS=2x600x0.5=$600PriceControlsGovernmentssometimesinterveneinmarketsusingpricecontrolsiftheequilibriumpriceistoohighforconsumersortoolowforproducers.Whatisapriceceiling?Priceceilingisalegalmaximumpriceatwhichagoodcanbesold.Apriceceilingkeepsapricefromrisingaboveacertainlevel.Assumethegraphontherightrepresentthemarketforburritos.Supposethegovernmentimposesapriceceilinginthismarketatapriceof$5.00,whatwouldbetheresult?Quantitydemanded=60Quantitysupplied=40Quantitytraded=40Therewouldbeashortageof20burritos.Whatkindofpricecontrolisrentcontrolanexampleof?Rentcontrolisanexampleofamaximumpricecontrol(priceceiling).Listtheconsequencesofrentcontrols.
• Rentcontrolscreateashortageofapartmentsavailableforrentalpurposes.Theshortagegetsworseinthelongrunaslandlordsmayconverttheirapartmentstoco-opsandcondos,reducingthequantityofapartmentsavailableforrentalpurposes.
• Thequalityofapartmentsdecreasessincelandlordstendtospendlessonmaintenance.
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Supposethefollowingtablerepresentsthedemandandthesupplyofbicycles.Whathappensifgovernmentimposesapriceceilingof$100perbicycle?Price Quantitydemanded Quantitysupplied$160 20 80$120 40 40$100 50 20$80 60 0Apriceceilingof$100wouldcreateashortageof30bicycles.Supposethefiguresshownbelowrepresentthemarketfor3Dprinters.Ononeofthemarketsaneffectivepriceceilingisimposed.Theothermarkethasanineffectivepriceceiling.Identifywhichoneiswhich.(Note:effectivepriceceilingisabindingpriceceilingthatwouldaltertheinitialmarketequilibrium.Ineffectivepriceceilingisnotabindingonewhichwouldnothaveanyeffectontheinitialmarketequilibrium)
IneffectivePriceCeiling EffectivePriceCeilingInwhichpanel(s)inthefigureshownabove,wouldtherebeashortagefor3Dprintersattheceilingprice?Panel(b).Thisisaneffectivepriceceilingasitisintroducedbelowthemarketequilibriumpriceandhencecreatesshortage.Whatisapricefloor?Apricefloorisalegalminimumpriceatwhichagoodcanbesoldisaprice.Apricefloorkeepspricesfromfallingbelowagivenlevel.Whatkindofpricecontrolisminimumwageanexampleof?Minimumwageisanexampleofapricefloor.Supposethegraphshowsthemarketforunskilledlabor.Ifthegovernmentimposesaminimumwageof$14.00inthismarket,whatwouldbetheresult?Atthisminimumwageweseethatthequantitydemandedoflaborwillbelessthanthequantitysupplied.Quantitydemandedoflabor=30Quantitysuppliedoflabor=70 Therewouldbeexcesssupplyof40.(Unemploymentof40)
ExplicitandImplicitCosts,AccountingandEconomicProfitWhatdoweassumeineconomicsthattheaimofthefirmsis?Theaimofthefirmsistomaximizeprofit.Howisprofitcalculated?Profit=TotalRevenue–TotalCostHowistotalrevenuecalculated?TotalRevenue=PricexQuantityWhatisthedifferencebetweenaccountingprofitandeconomicprofit?EconomicProfit=TotalRevenue–(ExplicitCosts+ImplicitCosts)AccountingProfit=TotalRevenue–ExplicitCostsWhatisexplicitcost?Giveexamplesofexplicitcosts.ThecostswhichinvolveoutflowofcashduetopaymentstowardstheinputsusedinproductionisknownasExplicitCost.Theseareout-of-pocketcostsforafirm—forexample,paymentsforwagesandsalaries,rent,ormaterials.Whatisimplicitcost?Giveexamplesofimplicitcosts.Thecostsinwhichthereisnocashoutlay,buttherearetheopportunitycostofresourcesalreadyownedbythefirmandusedinbusiness—forexample,forgonesalaryinnextbestjobopportunityfortheowner,interestincomeforgoneonfundsusedforthebusiness,movingintoastorespacethatthebusinessalreadyownsinvolvesforgonerent,etc.Wolfgangcurrentlyworksforalawfirmforayearlysalaryof$125,000.Heisconsideringquittinghisjobandopeninghisownlawpractice,whereheexpectstobring$200,000revenueperyear.Tostarthisownfirm,hewouldneedanofficespaceandalawclerk.Theofficespacehefoundrentsfor$50,000peryear.Alawclerkcouldbehiredfor$35,000peryear.ListWolfgang’sexplicitcosts.Howmuchishisexplicitcosts?Explicitcosts:Officerental,Lawclerk’ssalaryExplicitcosts=Officerental+Lawclerk’ssalary=$50,000+$35,000=$85,000CalculateWolfgang’saccountingprofit.Accountingprofit=Revenues−Explicitcosts=$200,000−$85,000=$115,000ListWolfgang’simplicitcosts.Howmuchishisimplicitcosts?Implicitcosts:ThesalaryhewouldhavetogiveuponcehequitshiscurrentjobImplicitcosts:Forgonesalary=$125,000
ShouldWolfgangopenhisownlawpractice?Toanswerthisquestion,whatelsewouldyouwanttoknow?Inordertomakethisdecision,weneedtocalculateWolfgang’seconomicprofit.EconomicProfit=TotalRevenue–(ExplicitCosts+ImplicitCosts)EconomicProfit=200,000–($85,000+$125,000)=-$10,000ThenegativeeconomicprofitwouldmeanthatWolfgangwouldbeearning$10,000lessthanifheworkedforthecorporatefirm.Sohewouldbebetteroffstayingatthiscurrentjob.Supposeyouhavesecuredyourselfasummerjob,cuttinggrass.Youcharge$40perlawnandyoumow400lawnsoverthesummerbreak.Youspend$1,000onequipmentand$2,000ongasoline.YoucouldhaveworkedatMcDonaldsandearned$8,000overthesummer.Calculateyouraccountingprofitandeconomicprofit.WhichoptionisbetterforyoutoworkatMcDonaldsortocutgrass?Accountingprofit=Revenues−ExplicitcostsEconomicProfit=TotalRevenue–(ExplicitCosts+ImplicitCosts)Totalrevenue=$40x400=$16,000Explicitcosts=$1,000+$2,000=$3,000Implicitcosts=$8,000AccountingProfit=$16,000-$3,000=$13,000EconomicProfit=$16,000–($3,000+$8,000)=$5,000Sinceeconomicprofitispositive,youarebetterofcuttinggrass.Nexttoeachstatement,writeTfortrueorFforfalse.T 1.TotalRevenue=PricexQuantityT 2.Thedifferencebetweenaccountingprofitandeconomicprofitisimplicitcosts.F 3.Economicprofitisusuallybiggerthanaccountingprofit.KeyTermsMatcheachtermwithitsdefinition.
A.AccountingProfitFIncomefromsellingafirm’sproduct;definedaspricetimesquantitysoldB.EconomicProfitATotalrevenueminusexplicitcostsC.ExplicitCostsBTotalrevenueminus(explicitplusimplicitcosts)D.ImplicitCostsETheprocessofcombininginputstoproduceoutputE.ProductionHAnorganizationthatcombinesinputs(labor,capital,land,rawmaterials)toproduceoutputF.RevenueDOpportunitycostofresourcesalreadyownedbythefirmandusedinbusinessG.ProfitCOutofpocketcostsforafirm;suchaspaymentsforwages,rent,etc.H.FirmGThedifferencebetweenrevenueandcost,calculatedasRevenueminuscost
ProductionintheShortRunWhatarefixedinputs?Theseareinputsthatcannotbeeasilychangedintheimmediaterun.Capitalistypicallythefixed
inputintheshortrun.Whatarevariableinputs?Theseareinputsthatcanbeeasilyincreasedordecreasedintheshortrun.Laborisavariableinput.Howdowedefineshortrunineconomics?Thisistheperiodoftimeduringwhichatleastoneormoreofthefirm’sinputsisfixed.(i.e.firm
cannotchangethequantityoftheseinputsduringthattimeperiod).Howdowedefinelongrunineconomics?Thisistheperiodoftimeduringwhichallofthefirm’sinputsarevariable.(i.e.firmcanchangethe
quantityofalloftheinputsduringthattimeperiod.)Supposeyouhaveapizzarestaurant.Yourrestaurantisbecomingpopularandyouneedto
increaseyourproduction.Intheshortrunwhichofyourinputswouldbefixedandwhichwouldbevariable?Fixedinputs:Thespaceoftherestaurant,thenumberofpizzaovensinstalled,thetablesandchairs.Variableinputs:Workers,pizzaingredientsDefinemarginalproduct.Marginalproduct(MP)istheadditionaloutputofonemoreworker.Itiscalculatedasthechangein
totalproductdividedbychangeinlabor.Givendataintableformiflaborischangingby1fromrowtorowthentheformulaboilsdowntofindingthechangeinoutputfromonerowtothenext.Definethelawofdiminishingmarginalproduct.Asworkersareaddedintheshortrunwithcapitalbeingfixed.Marginalproductwillriseatfirst
butwilleventuallydeclineasworkersgetintoeachother’swayhavingtoworkwiththefixedinput.Youhaveasmallbusinesswherelumberjackscuttreeswithatwoperson-saw.Yourproduction
dataisgiveninthetablebelow.Fillinthemarginalproductcolumn.
No.oflumberjacks
No.oftreescut MarginalproductMP
0 0 1 4 42 10 63 12 24 13 15 13 0
Atwhichworkerdiminishingmarginalproductivitysetin?Withthe3rdworker
Supposeyouhaveasmallstandwhereyousellsnowcones.Thefollowingtableshowsthenumberofworkersandtheresultingsnowconeoutputthattheyproduce.Numberofworkers(L)
Totaloutput(Q)
MarginalProduct
AverageProduct
0 0 20 201 20 30 252 50 25 253 75 15 22.54 90 10 205 100 5 17.56 105 -5 14.287 100 -10 11.258 90 20 20
a) CalculateMPandAPoflaborandfillinthetable.b)Whendoesdiminishingmarginalproductivitybegin?
Diminishingmarginalproductivitybeginwiththe3rdworker.Yournewaccountantaccidentlylostsomeofyourdata.Luckilyusingtherelationshipbetweentotalproduct,averageproductandmarginalproductyouareabletofillinthebelowtable.Labor(L) TotalProduct
(Q)AverageProduct(APL)
MarginalProduct(MPL)
0 0 0 -1 19 19 192 72 36 533 153 51 814 256 64 1035 375 75 1196 504 84 1297 637 91 1338 768 96 131Nexttoeachstatement,writeTfortrueorFforfalse.T 1.Marginalproductistheadditionaloutputofonemoreworker.F 2.Laboristypicallyafixedinput.F 3.Marginalproductcanneverbenegative.KeyTermsMatcheachtermwithitsdefinition.
A.DiminishingFFactorsofproductionthatafirmcaneasilyincreaseordecreaseinmarginalproductivityashortperiodoftimeB.FixedinputsAAsfirmemploysmorelabor,capitalbeingfixed,additionaloutputproducedeventuallydeclinesC.MarginalproductESynonymforfirm’soutputD.ShortrunGResourcesfirmsusetoproducetheirproductsE.TotalproductDPeriodoftimeduringwhichatleastoneormoreofthefirm’sinputsisfixedF.VariableinputsCChangeinfirm’soutputwhenitemploysonemoreworkerG.FactorsofproductionHPeriodoftimeduringwhichallofthefirm’sinputsarevariableH.LongrunBFactorsofproductionthatcan’teasilybeincreasedordecreasedinashortperiodoftime
CostsintheShortRunDefinefixedcosts.Fixedcostsareexpendituresthatdonotchangeregardlessofthelevelofproduction.Thesecostsare
thecostoffixedinputs.Definevariablecosts.Variablecostsarethecostsofvariableinputs.Definetotalcosts.Totalcostsarethesumoffixedplusvariablecosts.TC=FC+VCSupposeyouownalawncarebusinesswhereyouprovidemowingservices.Yourfixedinputis
twolawnmowersthatyourented.Therentforeachlawnmoweris$80permonth.Yourvariableinputisworkersyouhire.Yourtotalcostisprovidedinthetablebelow.Fillinthemissingentries.WeknowthattheFC=$160sowefillintheFCcolumn.WealsoknowthatTC=FC+VCSowecanfindVCbysubtractingFCfromTC.
Quantity FixedCost(FC) VariableCost(VC) TotalCost(TC)0 $160 0 10 $160 $40 $20018 $160 $90 $25023 $160 $160 $32029 $160 $240 $40035 $160 $330 $49040 $160 $340 $500Writetheformulasforaveragetotalcost(ATC),averagevariablecost(AVC),averagefixedcost(AFC)andmarginalcost(MC).ATC=TC/Q AVC=VC/Q AFC=FC/Q MC=ChangeinTC/changeinQPleaserefertothelawncarebusinessproblemgivenabove.Usingthetableyoufilledpleaseanswerthefollowingquestions:Whatistheaveragevariablecostofproducing18lawnservices?AVC=VC/Q=90/18=$5Whatistheaveragefixedcostofproducing35lawnservices?AFC=FC/Q=160/35=$4.57Whatistheaveragetotalcostofproducing40lawnservices?ATC=VC/Q=500/40=$12.5DescribetherelationshipbetweenMCandATC.(thesamerelationshipappliestoMCandAVC)WhenMCishigherthanATC,ATCrises.WhenMCislowerthanATC,ATCdecreases.
SupposeyouareoperatingabicyclemessengerservicefordowntownColumbus.Thenumberofemployeesandthecorrespondingnumberofparcelsthattheycandeliverinamonthisgivenbythefirsttwocolumnsofthebelowtable.Youleased5bicycleswitha$500leaseoneachthatincludestheliabilityinsurance.Youarealsopaying$3,000permonthtorenttheofficespaceand$500forwebsitehostingandphoneservice.Youpay$800monthlysalarytoeveryworkeryouemploy.Giventhisinformation,fillinthetablebelow.Numberofworkers(L)
Totaloutput(Q)
FixedCosts VariableCosts TotalCost
0 0 6000 0 60001 30 6000 800 68002 65 6000 1600 76003 100 6000 2400 84004 130 6000 3200 92005 150 6000 4000 100006 160 6000 4800 108007 165 6000 5600 11600SupposeJanisstartingupasmallcoffeecartbusinessinfrontofCornsbuilding.VariablecostsforJan’scoffeecartbusinesswouldincludethecostofwhichofthefollowing: a. costofbuildingthecartFC b. costofhiringagraphicdesignertodesignherbannerforherbusinessFC c. costofgroundcoffee d. costoftheespressomachinesheleasedforonesemesterFCe. AlloftheaboveIfafirmproducesnothing,whichofthefollowingcostswillbezero? a. totalcost b. fixedcost c. opportunitycost d. variablecostAveragetotalcostisequalto a. output/totalcost. b. totalcost–totalquantityofoutput. c. averagevariablecost+totalfixedcost. d. totalcost/output.Thecostofproducinganadditionalunitofoutputisthefirm’s a. marginalcost. b. productivityoffset. c. variablecost. d. averagevariablecost.Marginalcosttellsusthe a. valueofallresourcesusedinaproductionprocess. b. marginalincrementtoprofitabilitywhenpriceisconstant. c. amountbywhichtotalcostriseswhenoutputisincreasedbyoneunit. d. amountbywhichoutputriseswhenlaborisincreasedbyoneunit.
Diminishingmarginalproductsuggeststhatthemarginal a. costofanextraworkerisunchanged. b. costofanextraworkerislessthanthepreviousworker’smarginalcost. c. productofanextraworkerislessthanthepreviousworker’smarginalproduct. d. productofanextraworkerisgreaterthanthepreviousworker’smarginalproduct.Theaveragefixedcostcurve a. alwaysdeclineswithincreasedlevelsofoutput. b. alwaysriseswithincreasedlevelsofoutput. c. declinesaslongasitisabovemarginalcost. d. declinesaslongasitisbelowmarginalcost.Whenmarginalcostislessthanaveragetotalcost, a. marginalcostmustbefalling. b. averagevariablecostmustbefalling. c. averagetotalcostisfalling. d. averagetotalcostisrising.Whenmarginalcostexceedsaveragetotalcost, a. averagefixedcostmustberising. b. averagetotalcostmustberising. c. averagetotalcostmustbefalling. d. marginalcostmustbefalling.Thecurvesbelowreflectinformationaboutthecoststructureofafirmwhichproducescellphones.Usethefiguretoanswerquestionsbelow.
Writetheletterofthecurvethatismostlikelytorepresentaveragetotalcost:B Writetheletterofthecurvethatismostlikelytorepresentaveragefixedcost:D Writetheletterofthecurvethatismostlikelytorepresentaveragevariablecost:CWritetheletterofthecurvethatismostlikelytorepresentmarginalcost:A
Foralargefirmthatproducesandsellsautomobiles,whichofthefollowingcostswouldbeavariablecost? a. the$20millionpaymentthatthefirmpayseachyearforaccountingservices b. thecostofthesteelthatisusedinproducingautomobiles c. therentthatthefirmpaysforofficespaceinasuburbofSt.Louis d. Alloftheabovearecorrect.Staplers–R-Usproducesandsellsstaplers.Lastyear,itproduced5,000staplersandsoldeachstaplerfor$8.Inproducingthe5,000staplers,itincurredvariablecostsof$30,000andatotalcostof$45,000.Howmuchisthefirm’sfixedcosts? FC=$15,000. Inproducingthe5,000staplers,whatwasthefirm’saveragefixedcost?AFC=FC/Q=15,000/5,000=$3Inproducingthe5,000staplers,whatwasthefirm’saveragevariablecost?AVC=VC/Q=30,000/5,000=$6 Inproducingthe5,000staplers,whatwasthefirm’saveragetotalcost?ATC=TC/Q=45,000/5,000=$9OrATC=AFC+AVC=$3+$6=$9 Whatwashefirm’seconomicprofitfortheyear?TR=PxQ=8x5,000=$40,000Profit=TR–TC=$40,000-$45,000=-$5,000 Harry'sHotdogsisasmallstreetvendorbusinessownedbyHarryHuggins.IfHarrymakes15hotdogsinhisfirsthourofbusinessandincursatotalcostof$16.50,whatishisaveragetotalcostperhotdog?ATC=TC/Q=16.50/15=$1.10Yoursmallpizzashop,BishopsPizzahasthefollowingcosts.Totaloutput
TC FC VC AFC AVC ATC MC
0 $100 100 0 10 $120 100 20 10 2 12 220 $140 100 40 5 2 7 230 $170 100 70 3.3 2.3 5.6 340 $200 100 100 2.5 2.5 5 350 $260 100 160 2 3.2 5.2 660 $360 100 260 1.6 4.3 6 10Fillinthebelowtablebycalculatingfixedcosts,variablecosts.averagefixedcosts,averagevariablecosts,averagetotalcostsandmarginalcosts.
Fillintheblanks.Totalcostdividedbythequantityofoutputistheaveragetotalcost.TheaveragetotalcostisusuallyaUshapedcurvethatstartsrelativelyhighduetohighfixedcostsatlowlevelsofoutput,fallstoaminimumasoutputincreases,andthenrisesagainduetodiminishingreturns.DrawyourownsketchoftheATC,AVCandMCcurves.PayattentiontotheshapesofthecurvesandthepointofintersectionbetweentheMC,AVCandATC.Alsodon’tforgettofactorinaveragefixedcostforthedistancebetweenyourAVCandATCasoutputrises.KeyTermsMatcheachtermwithitsdefinition.
A.AveragetotalcostFCostofproductionthatincreaseswiththequantityproduced;thecostofvariableinputsB.AveragevariablecostATotalcostdividedbythequantityofoutputC.FixedcostEThesumoffixedandvariablecostsofproductionD.MarginalcostBVariablecostdividedbythequantityofoutputE.TotalcostCCostofthefixedinputs;expenditurethatafirmmustmakebeforeproductionstartsanddoesnotchangeregardlessoftheproductionlevelF.VariablecostDTheadditionalcostofproducingonemoreunitG.AveragefixedcostGFixedcostdividedbythequantityofoutput
Nexttoeachstatement,writeTfortrueorFforfalse.F 1.Marginalcostwillalwaysbegreaterthanaveragevariablecost.F 2.Sunkcostsshouldbeconsideredwhenmakingeconomicdecisionsaboutfuture
production.T 3.WhenMCishigherthanATC,ATCrises.
CostsintheLongRunWhatiseconomiesofscale?Economiesofscaleoccurwhenincreasingoutputleadstolowerlong-runaveragecosts.Whatarediseconomiesofscale?Diseconomiesofscaleoccurwhenincreasingoutputleadstohigherlong-runaveragecosts.Howdoweobtainthelongrunaveragecostcurvefromtheshortrunaveragecostcurves?Thelongrunaveragecostcurve(LRAC)isacollectionofshortrunaveragecostcurves(SRAC)(itisthelowerenvelopeoftheSRACcurves).Thelongrunaveragecostcurve(LRAC)istheleastexpensiveaveragecostcurveforanylevelofoutput.Sketchagraphofafirm’slongrunaveragecostcurveshowingeconomiesofscale,constantreturnstoscaleanddiseconomiesofscale.Labelyouraxesandthethreescaleareasonyourgraph.
Thefigurebelowdepictsaveragetotalcostfunctionsforafirmthatproducesautomobiles.
Whichofthecurvesismostlikelytocharacterizetheshort-runaveragetotalcostcurveofthesmallestfactory?ATCAWhichcurverepresentsthelong-runaveragetotalcost?ATCDWritethenameoftheaveragetotalcostcurvesthatthefirmcanoperateoninthelongrunThefirmcanoperateonanyoftheaveragecostcurvesinthelongrun.Namely,ATCAorATCBor
ATCCWhatoutputlevelsdoesthisfirmexperiencediseconomiesofscale?OutputlevelsaboveN AtlevelsofoutputbelowMwhattypeofreturnstoscaledoesthefirmexperience?Economiesofscale. KeyTermsMatcheachtermwithitsdefinition.
A.ConstantreturnsBThelongrunaveragecostofproducingoutputdecreasesastotaloutputtoscaleincreasesB.EconomiesofScaleETheaveragetotalcostcurveintheshortterm;showsthetotaloftheaveragefixedcostsandaveragevariablecostsC.DiseconomiesofScaleDShowsthelowestpossibleaveragecostofproduction,allowingalltheinputstoproductiontovarysothatthefirmischoosingallinputsoptimallyD.LongrunaverageCThelongrunaveragecostofproducingoutputincreasesastotaloutputcostcurve(LRAC)increasesE.ShortrunaverageAExpandingoutputdoesnotchangethelongrunaveragecostofproductioncostcurve
ExercisesonPerfectCompetitionWhenafirmhasnoabilitytoinfluencemarketpricesitissaidtobeinwhatkindofamarket? acompetitivemarket
Inacompetitivemarket,howwilltheactionsofanysinglebuyerorsellerimpactthemarketprice?ItwillhavenoimpactonthemarketpriceListanddescribethecharacteristicsofaperfectlycompetitivemarket.
• Therearemanybuyersandsellersinthemarket.• Thegoodsofferedbythevarioussellersarethesame.• Firmscanfreelyenterorexitthemarketastherearenosignificantentrybarriers.
Whywouldafirminaperfectlycompetitivemarketalwayschoosetosetitspriceequaltothecurrentmarketprice?Ifafirmsetitspricebelowthecurrentmarketprice,whateffectwouldthishaveonthemarket?
Thefirmcouldnotsellanymoreofitsproductatalowerpricethanitcouldsellatthemarketprice.Asaresult,itwouldneedlesslyforgorevenueifitsetsapricebelowthemarketprice.Ifthefirmsetsahigherprice,itwouldnotsellanythingatallbecauseacompetitivemarkethasmanysellerswhowouldsupplytheproductatthemarketprice.
MangeroffirmX,reportsthathefacesthefollowingpriceandquantityrelationshipforhisproduct:Quantity(q)Price(P) 1 13 2 13 3 13 4 13 5 13 6 13 7 13 8 13 9 13
Thepriceandquantityrelationshipinthetableaboveismostlikelythatfacedbyafirminwhattypeofmarketstructure?CompetitivemarketOverwhichrangeofoutputismarginalrevenueequaltoprice?Marginalrevenueisequaltopriceoverthewholerangeofoutput(MR=P)Overwhatrangeofoutputismarginalrevenuedeclining? None;marginalrevenueisconstantoverthewholerangeofoutputandisequaltoprice.
Forafirm,likefirmXinaperfectlycompetitivemarket,whattypeofrelationshipistherebetweenthepriceofthegoodandmarginalrevenue?Priceisequaltomarginalrevenue.(P=MR)ManageroffirmXisdebatingwhetherheshoulddecreasehispricebelow$13tosellmoreunits.
Pleaseadvise.BecausethefirmXisoperatinginacompetitivemarket,thegoodofferedforsaleisahomogenousgood,andfirmXwon’tbenefitfromloweringitspriceasthefirmcansellallitwantsat$13andhencehasnoreasontochargelessthantheprevailingmarketprice.InclasswesaidthatthefirmslikefirmXinperfectcompetitionarepricetakers,itimpliesthatif
firmXraisesitsprice,whatwillhappen?FirmXwon’tsellanyunits,asthebuyerswillgoelsewhere.IffirmXinacompetitivemarketreportstohavezeroeconomicprofit,whatcanyouinferabout
itsaccountingprofit?Itsaccountingprofitispositive.
Whenafirminacompetitivemarketproduces10unitsofoutput,ithasamarginalrevenueof$8.Whatwouldbethefirm’sprice?Inperfectcompetition:price=marginalrevenue(P=MR)andthereforeprice=$8Choosethecorrectanswerforthefollowingmultiple-choicequestions:Inacompetitivemarket, a. eachsellercansellallhewantstosellatthegoingprice. b. buyersandsellersarepricetakers. c. thegoodsofferedbythedifferentsellersarelargelythesame. d. Alloftheabovearecorrect.Forafirminaperfectlycompetitivemarket,thepriceofthegoodisalways a. equaltomarginalrevenue. b. equaltototalrevenue. c. greaterthanaveragerevenue. d. Alloftheabovearecorrect.WhichofthefollowingisNOTacharacteristicofaperfectlycompetitivemarket? a. Firmsarepricetakers. b. Firmshavedifficultyenteringthemarket. c. Therearemanysellersinthemarket. d. Goodsofferedforsalearelargelythesame.Whichofthefollowingstatementsbestreflectsaprice-takingfirm? a. Ifthefirmweretochargemorethanthegoingprice,itwouldsellnoneofitsgoods. b. Thefirmhasnoincentivetochargelessthanthegoingprice. c. Thefirmcansellasmuchasitwantstosellatthegoingprice. d. Alloftheabovearecorrect.
Youaregiventhefollowingdataforafirmoperatinginacompetitivemarket.FillintheremainingcolumnsforMRandMC. QuantityTotalRevenueTotalCostMarginalRevenueMarginalCost 0 $0 $109 1 9 149 4 2 18 199 5 3 27 259 6 4 36 329 7 5 45 409 8 6 54 499 9 7 63 599 10 8 72 709 11Ataproductionlevelof4unitswhatistherelationshipbetweenTRandVC?Totalrevenueisgreaterthanvariablecost.Atwhichquantityofoutputismarginalrevenueequaltomarginalcost? Atq=6Whatistheformulatocalculatetotalprofitforafirm?Profit=Totalrevenue-TotalcostCanyouexpressthetotalprofitformulaintermsofperunitprofit?
Profit=(Price–Averagetotalcost)xOutputWhatistheruleforprofitmaximization?ChoosetheoutputwhereMR=MCTheWheelerWheatFarm,whichoperatesinacompetitivemarket,sellswheattoagrainbroker
inSeattle,Washington.TheWheelerWheatFarmreportsthefollowingdata: Quantity(q)TotalRevenue TotalCost 0 $0 $10 1 9 14 2 18 19 3 27 25 4 36 32 5 45 40 6 54 49 7 63 59 8 72 70 9 81 82 a)Atwhichquantityofoutputismarginalrevenueequaltomarginalcost?SinceTR=Pxq,weknowthatthepriceis$9.SinceP=MR,weknowthatMR=9CalculatingMCforeachoutputlevelweseethatatq=6,MR=MC.b)Supposeinthewheatindustry,achangeindemandresultsthewheatpricestoriseto$11.
Whatshouldthewheatfarmdotomaximizeitsprofit?Increaseitsoutputto8.
c)Supposeadecreaseindemandcausedwheatpricestodropto$5intheindustry.Whatshouldthewheatfarmdotomaximizeitsprofit?Increaseproductionto2.d)Wheelerfarm’smanagertellsyouthatthetotalrevenueislessthanvariablecostsattheir
profitmaximizingoutput.Whatwouldyouadvise?Shutdown.e)TheRoadrunnerfarm,Wheeler’soneofcompetitors,reportsthatattheirprofitmaximizing
output,thepriceisbelowaveragevariablecost.Whatwouldyouadvise? Shutdownandincurfixedcosts.f)Whenwouldaprofit-maximizingfirmshutdownintheshortrun?(Writeyourexpressionintermsofoneunitofoutput)Price<AverageVariableCost(P<AVC)g)Whenwouldaprofit-maximizingfirmshutdownintheshortrun?(Writeyourexpressionintermsofqunitsofoutput)Totalrevenue<Variablecost(TR<VC)
Inthelongrunallofafirm’scostsarevariable.Inthiscase,whatistheexitcriterionforaprofit-maximizingfirm?Price<averagetotalcost(P<LRAC)
Whenprofit-maximizingfirmsincompetitivemarketsareearningprofits,inthelongrunwhatwouldhappen?Newfirmswillenterthemarket,increasingthemarketsupply,decreasingtheequilibriumprice,decreasingtheindividualfirmprofitsuntileconomicprofitsdisappear.
Youwitnessednewfirmsenteringacompetitivemarket.Whatcanyouinferfortheexistingfirmsinthatmarket?Existingfirmsmusthavebeenenjoyingpositiveeconomicprofitorthatpriceexceedsaveragetotalcostfortheexistingfirms.
Indoorknobmanufacturingindustry,youobservedthatthefirmsaremakinglosses.Inthelongrunwhatwouldhappen?Someoftheexistingfirmswouldleavethemarket.Themarketsupplywoulddecreasewhichinturnwouldincreasethemarketpricefordoorknobs.Individualfirmlosseswoulddecreaseandexitoffirmswouldstopwhenindividualfirmprofitsreachtozero.
Youobservedthatinthelongrun,aprofit-maximizingfirmchosetoexitamarket.Whatcanyouinferabouttheprofitsofthisfirm?Profitsarenegative(totalrevenueislessthantotalcost)
Whatsignalsthefirmstoenterorexitamarketinacompetitiveindustry?Existenceofprofitsandlosses.
Youobservedthatfirmsareneitherenteringnorexitingthecompetitiveindustrywheresoybeansareproduced.Listallthatyoucaninferaboutexistingfirmsdatafromthisobservation.
• TotalcostmustequalTotalrevenue.• Economicprofitsmustbezero.• Pricemustequaltomarginalcostandaveragetotalcost(P=MC=LRAC)
Afirminacompetitivemarkethasthefollowingcoststructure: Output TotalCost 0 $5 1 $10 2 $12 3 $15 4 $24 5 $40 a)Ifthemarketpriceis$3,whatwillthisfirmdointheshortrun?P=MR=3WeneedtocalculateMC. Output TotalCost MC 0 $5 1 $10 5 2 $12 2 3 $15 3 4 $24 9 5 $40 16Tomaximizeprofit,thefirmwillchooseanoutputwhereMR=MCsoq*=3Sinceprofitisnegativeatthisoutput,weneedtocheckforshutdownandcompareTRtoVC.Atq=3,TR=3x3=$9andVC=$10sofirmwouldshutdownandproducenothing.b)Ifthemarketpriceis$3,whatwillthisfirmdointhelongrun?Sinceprofitisnegativeattheprofitmaximizingoutputlevel,thefirmwouldexitinthelongrun.c)Ifthemarketpriceis$9,whatwillthisfirmdointheshortrun?P=MR=$9Tomaximizeprofit,thefirmwillchooseanoutputwhereMR=MCsoq*=4Sinceprofitispositiveatthisoutput,wedonotneedtocheckforshutdown.Sothefirmwouldenjoyaprofitof$12intheshortrun.
Ineachofthediagramsbelowthefigureontherightrepresentstheperfectlycompetitivemilkindustry.Theoneontheleftrepresentsanindividualmilkproducerinthismarket.Inalldiagramstheverticalaxisismeasuredindollars,andthehorizontalaxisrepresentsoutput.ThediagramsarelabeledA,BandC.Matchtheletterofthegraphtothecorrectscenariogivenbelow.
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individualfirmsaremakingpositiveeconomicprofit.ThemarketindiagramBisintheLRequilibriumsinceindividualfirmsaremakingzero
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‘Squeaky-Clean’isacarwashcompanyoperatinginaperfectlycompetitivemarketintheshortrun.Thetotalcostofprovidingcarwashserviceforvariousoutputlevelsisgivenbelow.Moreover,theSqueaky-Clean’sfixedcosts(FC)aregivenas$30.Output(Q) TotalCost(TC)
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‘Squeaky-Clean’intheshortrun?Whatisthetotalprofitofthisfirm?P=MR=$8.CalculateMC.Tomaximizeprofit,choosetheoutputwhereMR=MCsoq*=5Output(Q) TotalCost(TC) MC
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Profit=TR–TC=8x5–63=-23NeedtocheckforshutdownsocompareTRtoVC.TR=$40andVC=$33soproduceq*=5andincuralossof$23.
TheshortRunCostCurvesforafirmoperatinginaperfectlycompetitivemarketaregivenbelow.
Ifthemarketpriceis$7intheperfectlycompetitiveindustry,intheshortrunhowmanyunits
willthisfirmproduce?Howmuchprofitwillitmake?P=MR=$7TomaximizeprofitthefirmwillchoosetheoutputwhereMR=MCandthusq*=80Sinceatq*=80P>AVC,thefirmwouldnotshutdown.Profit=(P–ATC)xq=(7–8)x80=-$80Giveanexampleofapricewherethisfirmmakespositiveeconomicprofit?P=$10Infactforallpricesthataregreaterthan$8(whereMC=ATC)thefirmwouldmakepositiveeconomicprofit.Giveanexampleofapricewherethisfirmmakesnegativeeconomicprofit?P=$7.50Infactforallpricesthatarelessthan$5.90(whereMC=AVC)thefirmwouldmakenegativeeconomicprofit.CanyoucalculatetheFCoftheabovefirmfromthecostcurvesdrawnabove?ATC=AFC+AVC.Thisrelationshipholdsatanyoutputlevel.Considerq=80whereATC=$8andAVC=$6soAFC=$2.NowFC=AFCxq=2x80=$160Describethechangesthatwouldtakeplaceinthelongruninacompetitivemarketwherefirmsareearningeconomicprofitsintheshortrun.Inacompetitivemarketwherefirmsareearningeconomicprofits,newfirmswillhaveanincentivetoenterthemarket.Thisentrywillincreasethenumberoffirms,increasethesupply,anddrivedownpricesandprofits.
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Describethechangesthatwouldtakeplaceinthelongruninacompetitivemarketwherefirmsaremakingnegativeprofitsintheshortrun.Inacompetitivemarketwherefirmsareearningnegativeprofits,somefirmswillleavethemarket.Thisexitoffirmswilldecreasethenumberoffirms,decreasethesupply,andincreasepricesandreduceindividualfirmlosses.
TheresidentialguttercleaningindustrycomprisesofmanyidenticalfirmsofferingthesameserviceinColumbus.Thediagramontherightrepresentstheperfectlycompetitiveguttercleaningindustry.Thelongruncostsof“WeGutGutters”,arepresentativefirmintheindustry,areshownintheleft-handpanel.
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Giventhedataabove,whatisthecurrentmarketpriceforguttercleaning?$60Giventhecurrentmarketprice,determinehowmanyguttercleaningserviceswill“WeGut
Gutters”provideintheshortrunifitwantstomaximizeprofit?q=15Atthecurrentmarketpricewhatisthetotalindustryoutput?Q=2000
Istheguttercleaningindustrycurrentlyinlongrunequilibrium?Ifnot,willthefirmsenterorexittheindustry?ItisnotinLRequilibrium.Morefirmswillentertheindustry.Whatwillbetheequilibriumpriceofaguttercleaningserviceinthelongrun?P=$40Inthelongrun,howmanyguttercleaningserviceswill“WeGutGutters”provide?q=10
