Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for...

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Discussion Session 2

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Transcript of Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for...

Page 1: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Discussion Session 2

Page 2: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Marginal Benefit

• The following table shows Abby’s willingness to pay for apples• Calculate her marginal benefit from apples.

Quantity of apples (pounds)

Willingness to pay Marginal Benefit

0 $01 $72 $133 $184 $225 $25

Page 3: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Marginal Benefit

• The following table shows Abby’s willingness to pay for apples• Calculate her marginal benefit from apples.

Quantity of apples (pounds)

Willingness to pay Marginal Benefit

0 $0 -1 $7 72 $13 63 $18 54 $22 45 $25 3

Page 4: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Marginal Benefit

• Let’s draw Abby’s individual demand curve for apples.• If the market price of apples is $5/lb, how many pounds of

apples will Abby buy?• Abby will buy if P<MB, until P = MB, so she will buy 3 lbs

of apples.•What is her consumer surplus?• It is TB – P x Q = 18 – 5 x 3 = 18 – 15 = 3

Page 5: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

1) Fill out the entries in the table.2) Suppose that the firm is a price taker, and market price is $9. What

quantity will the firm produce?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 81 122 153 214 305 50

Page 6: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

1) Fill out the entries in the table.2) Suppose that the firm is a price taker, and market price is $9. What

quantity will the firm produce?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 81 12 82 15 83 21 84 30 85 50 8

Page 7: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

1) Fill out the entries in the table.2) Suppose that the firm is a price taker, and market price is $9. What

quantity will the firm produce?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 -1 12 8 42 15 8 33 21 8 64 30 8 95 50 8 20

Page 8: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

1) Fill out the entries in the table.2) Suppose that the firm is a price taker, and market price is $9. What

quantity will the firm produce?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 42 15 8 7 33 21 8 13 64 30 8 22 95 50 8 42 20

Page 9: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

1) Fill out the entries in the table.2) Suppose that the firm is a price taker, and market price is $9. What

quantity will the firm produce?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 12 42 15 8 7 7.5 33 21 8 13 7 64 30 8 22 7.5 95 50 8 42 10 20

Page 10: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

2) Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - - - -1 12 8 4 12 4 42 15 8 7 7.5 3.5 33 21 8 13 7 4.33 64 30 8 22 7.5 5.5 95 50 8 42 10 8.4 20

Page 11: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

2) Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce?The firm produces quantity where P = MC. When MC = $9, Q = 4

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 12 4 42 15 8 7 7.5 3.5 33 21 8 13 7 4.33 64 30 8 22 7.5 5.5 95 50 8 42 10 8.4 20

Page 12: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

3) What is the profit/loss?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 12 4 42 15 8 7 7.5 3.5 33 21 8 13 7 4.33 64 30 8 22 7.5 5.5 95 50 8 42 10 8.4 20

Page 13: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

3) What is the firm’s profit/loss?Profit = Total Revenue – Total Cost = P x Q – ATC x Q = 9 x 4 - 7.5 x 4 = 6

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 12 4 42 15 8 7 7.5 3.5 33 21 8 13 7 4.33 64 30 8 22 7.5 5.5 95 50 8 42 10 8.4 20

Page 14: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

4) What is the break-even price?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 12 4 42 15 8 7 7.5 3.5 33 21 8 13 7 4.33 64 30 8 22 7.5 5.5 95 50 8 42 10 8.4 20

Page 15: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

4) What is the break-even price?The break-even price equals to the minimum of ATC = $7

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 12 4 42 15 8 7 7.5 3.5 33 21 8 13 7 4.33 64 30 8 22 7.5 5.5 95 50 8 42 10 8.4 20

Page 16: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

5) What is the shut-down price?

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 12 4 42 15 8 7 7.5 3.5 33 21 8 13 7 4.33 64 30 8 22 7.5 5.5 95 50 8 42 10 8.4 20

Page 17: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Cost Curves

5) What is the shut-down price?The shut-down price equals to the minimum of AVC = $3.5

Quantity Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Average TC(ATC)

Average VC(AVC)

Marginal Cost(MC)

0 8 8 - -1 12 8 4 12 4 42 15 8 7 7.5 3.5 33 21 8 13 7 4.33 64 30 8 22 7.5 5.5 95 50 8 42 10 8.4 20

Page 18: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

Deriving the Market Supply Curve

Derive the market supply curve

Quantity Firm AMC

Firm BMC

01 10 152 20 253 35 454 55 655 80 100

Page 19: Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

The Rise and Fall of Industries

Suppose that apple farming in the United States can be represented by a competitive industry. Currently the industry is in long run equilibrium.Consider the case of cost-reducing technologies. For examples, scientists develop new high-yield seeds that produce more apples at a lower cost.1) Explain how the industry would adjust to a decrease in cost of production of apples.2) Analyze what happens in the short run as well as in the long run.


Review From last Class What does “marginal” mean? T or F: You should continue consuming something as long as marginal benefit > marginal cost. If MB is.

Review From last Class What does “marginal” mean? T or F: You should continue consuming something as long as marginal benefit > marginal cost. If MB is.

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Appendix Tools of Microeconomics. 1. The Marginal Principle Simple decision making rule We first define: Marginal benefit (MB): the benefit of an extra.

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