Download - Consumer Surplus, Producer Surplusjjyazar/econ110/midterm2studypacket.pdfConsumer Surplus, Producer Surplus What is willingness to pay? How does it relate to the demand curve? What

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ConsumerSurplus,ProducerSurplusWhatiswillingnesstopay?Howdoesitrelatetothedemandcurve?Whatisconsumersurplus?Whatdoesitmeasure?

Writetheformulaforconsumersurplus.Supposetheconsumeriswillingtopay$20.00foraparticulargoodbutonlyhadtopay$14.00forit.Whatistheconsumersurplus?Ifaconsumeriswillingtopay$15.00foraparticulargoodbutthepriceofthegoodis$17.00,thenwhatwouldbetheconsumersurplus?Belvaiswillingtopay$65.00forapairofshoesforaformaldance.Shefindsapairatherfavoriteoutletshoestorefor$48.00.CalculateBelva’sconsumersurplus. Janinewouldbewillingtopay$50toseeLesMisérables,butbuysaticketforonly$30.HowmuchdoesJaninevaluestheperformance?Denisevaluesastainlesssteeldishwasherforhernewhouseat$500,butbuysitfor$350.WhatisDenise’swillingnesstopay? Nathanbuysanewsoundsystemforhisdormroomfor$500.Hereceivesconsumersurplusof$400fromthepurchase.HowmuchdoesNathanvaluehissoundsystem?

BUYER

WILLINGNESSTOPAY

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$50.00

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$30.00

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$20.00

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$10.00

Ifthetablerepresentsthewillingnesstopayof4buyersandthepriceoftheproductis$15,thenwhowouldbewillingtopurchasetheproduct?Onagraph,describehowtofindtheconsumersurplusarea.Accordingtothegraphshown,whenthepriceisP1consumersurplusisgivenbywhicharea? Accordingtothegraphshown,atthepriceofP2,consumersurplusisgivenbywhicharea?Whatdopointsalongthesupplycurverepresent?Whatistheformulaforproducersurplus? Onagraph,describehowtofindtheproducersurplusarea.Rogerproducescomputerboards.Hisproductioncostis$10perboard.Hesellstheboardsfor$25each.Whatishisproducersurplus?

Accordingtothegraphshown,attheequilibriumprice,whatistheconsumersurplus? Accordingtothegraphshown,attheequilibriumprice,whatistheproducersurplus?Accordingtothegraphshown,attheequilibriumprice,whatisthetotalsurplus?ThereareonlyfiveconsumersinterestedinHangover3Blueraydiscs.ThemaximumwillingnesstopayoftheseconsumersforHangover3Blueraydiscaregivenbelow:

Emily $10Carter $14Angela $16Greyson $19Jack $20

a) DrawthemarketdemandcurveforHangover3blueraydisc.

b)SupposethepriceofHangover3blueraydiscis$15.Howmanyunitswouldbesold?Howmuchwouldbetheconsumersurplus?c)SupposethepriceofHangover3blueraydiscis$14.Howmanyunitswouldbesold?Howmuchwouldbetheconsumersurplus?

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Supposethedemandandsupplycurvesfortomatoesaregivenbelow.

Calculatetheconsumersurplus,producersurplusandtotalsurplusunderfreemarketequilibrium.PriceControlsGovernmentssometimesinterveneinmarketsusingpricecontrolsiftheequilibriumpriceistoohighforconsumersortoolowforproducers.Whatisapriceceiling?Assumethegraphontherightrepresentthemarketforburritos.Supposethegovernmentimposesapriceceilinginthismarketatapriceof$5.00,whatwouldbetheresult?Whatkindofpricecontrolisrentcontrolanexampleof?Listtheconsequencesofrentcontrols.

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Supposethefollowingtablerepresentsthedemandandthesupplyofbicycles.Whathappensifgovernmentimposesapriceceilingof$100perbicycle?Price Quantitydemanded Quantitysupplied$160 20 80$120 40 40$100 50 20$80 60 0Supposethefiguresshownbelowrepresentthemarketfor3Dprinters.Ononeofthemarketsaneffectivepriceceilingisimposed.Theothermarkethasanineffectivepriceceiling.Identifywhichoneiswhich.(Note:effectivepriceceilingisabindingpriceceilingthatwouldaltertheinitialmarketequilibrium.Ineffectivepriceceilingisnotabindingonewhichwouldnothaveanyeffectontheinitialmarketequilibrium)

Inwhichpanel(s)inthefigureshownabove,wouldtherebeashortagefor3Dprintersattheceilingprice?Whatisapricefloor?Whatkindofpricecontrolisminimumwageanexampleof?Supposethegraphshowsthemarketforunskilledlabor.Ifthegovernmentimposesaminimumwageof$14.00inthismarket,whatwouldbetheresult?

ExplicitandImplicitCosts,AccountingandEconomicProfitWhatdoweassumeineconomicsthattheaimofthefirmsis?Howisprofitcalculated?Howistotalrevenuecalculated?Whatisthedifferencebetweenaccountingprofitandeconomicprofit?Whatisexplicitcost?Giveexamplesofexplicitcosts.Whatisimplicitcost?Giveexamplesofimplicitcosts.Wolfgangcurrentlyworksforalawfirmforayearlysalaryof$125,000.Heisconsideringquittinghisjobandopeninghisownlawpractice,whereheexpectstobring$200,000revenueperyear.Tostarthisownfirm,hewouldneedanofficespaceandalawclerk.Theofficespacehefoundrentsfor$50,000peryear.Alawclerkcouldbehiredfor$35,000peryear.ListWolfgang’sexplicitcosts.Howmuchishisexplicitcosts?CalculateWolfgang’saccountingprofit.ListWolfgang’simplicitcosts.Howmuchishisimplicitcosts?ShouldWolfgangopenhisownlawpractice?Toanswerthisquestion,whatelsewouldyouwanttoknow?ThenegativeeconomicprofitwouldmeanthatWolfgangwouldbeearning$10,000lessthanifheworkedforthecorporatefirm.Sohewouldbebetteroffstayingatthiscurrentjob.Supposeyouhavesecuredyourselfasummerjob,cuttinggrass.Youcharge$40perlawnandyoumow400lawnsoverthesummerbreak.Youspend$1,000onequipmentand$2,000ongasoline.YoucouldhaveworkedatMcDonaldsandearned$8,000overthesummer.Calculateyouraccountingprofitandeconomicprofit.WhichoptionisbetterforyoutoworkatMcDonaldsortocutgrass?

Nexttoeachstatement,writeTfortrueorFforfalse.__________1.TotalRevenue=PricexQuantity__________2.Thedifferencebetweenaccountingprofitandeconomicprofitisimplicitcosts.__________3.Economicprofitisusuallybiggerthanaccountingprofit.KeyTermsMatcheachtermwithitsdefinition.

A.AccountingProfit________Incomefromsellingafirm’sproduct;definedaspricetimesquantitysoldB.EconomicProfit________TotalrevenueminusexplicitcostsC.ExplicitCosts________Totalrevenueminus(explicitplusimplicitcosts)D.ImplicitCosts________TheprocessofcombininginputstoproduceoutputE.Production_______Anorganizationthatcombinesinputs(labor,capital,land,rawmaterials)toproduceoutputF.Revenue________OpportunitycostofresourcesalreadyownedbythefirmandusedinbusinessG.Profit________Outofpocketcostsforafirm;suchaspaymentsforwages,rent,etc.H.Firm________Thedifferencebetweenrevenueandcost,calculatesasRevenueminuscost

ProductionintheShortRunWhatarefixedinputs?Whatarevariableinputs?Howdowedefineshortrunineconomics?Howdowedefinelongrunineconomics?Supposeyouhaveapizzarestaurant.Yourrestaurantisbecomingpopularandyouneedto

increaseyourproduction.Intheshortrunwhichofyourinputswouldbefixedandwhichwouldbevariable?Definemarginalproduct.Definethelawofdiminishingmarginalproduct.Youhaveasmallbusinesswherelumberjackscuttreeswithatwoperson-saw.Yourproduction

dataisgiveninthetablebelow.Fillinthemarginalproductcolumn.

No.oflumberjacks

No.oftreescut MarginalproductMP

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Atwhichworkerdiminishingmarginalproductivitysetin?

Supposeyouhaveasmallstandwhereyousellsnowcones.Thefollowingtableshowsthenumberofworkersandtheresultingsnowconeoutputthattheyproduce.Numberofworkers(L)

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a) CalculateMPandAPoflaborandfillinthetable.b) Whendoesdiminishingmarginalproductivitybegin?

Yournewaccountantaccidentlylostsomeofyourdata.Luckilyusingtherelationshipbetweentotalproduct,averageproductandmarginalproductyouareabletofillinthebelowtable.Labor(L) TotalProduct

(Q)AverageProduct(APL)

MarginalProduct(MPL)

0 0 0 -1 19 2 36 3 4 256 64 1035 375 6 1297 637 91 1338 96 Nexttoeachstatement,writeTfortrueorFforfalse.__________1.Marginalproductistheadditionaloutputofonemoreworker.__________2.Laboristypicallyafixedinput.__________3.Marginalproductcanneverbenegative.KeyTermsMatcheachtermwithitsdefinition.

A.Diminishing________FactorsofproductionthatafirmcaneasilyincreaseordecreaseinmarginalproductivityashortperiodoftimeB.Fixedinputs________Asfirmemploysmorelabor,capitalbeingfixed,additionaloutputproducedeventuallydeclinesC.Marginalproduct________Synonymforfirm’soutputD.Shortrun________ResourcesfirmsusetoproducetheirproductsE.Totalproduct________Periodoftimeduringwhichatleastoneormoreofthefirm’sinputsisfixedF.Variableinputs________Changeinfirm’soutputwhenitemploysonemoreworkerG.Factorsofproduction________Periodoftimeduringwhichallofthefirm’sinputsarevariableH.Longrun________Factorsofproductionthatcan’teasilybeincreasedordecreasedinashortperiodoftime

CostsintheShortRunDefinefixedcosts.Definevariablecosts.Definetotalcosts.Supposeyouownalawncarebusinesswhereyouprovidemowingservices.Yourfixeinputis

twolawnmowersthatyourented.Therentforeachlawnmoweris$80permonth.Yourvariableinputisworkersyouhire.Yourtotalcostisprovidedinthetablebelow.Fillinthemissingentries.

Quantity FixedCost(FC) VariableCost(VC) TotalCost(TC)0 $160 10 $160 $20018 $160 $25023 $160 $32029 $160 $40035 $160 $49040 $160 $500Writetheformulasforaveragetotalcost(ATC),averagevariablecost(AVC),averagefixedcost(AFC)andmarginalcost(MC).Pleaserefertothelawncarebusinessproblemgivenabove.Usingthetableyoufilledpleaseanswerthefollowingquestions:Whatistheaveragevariablecostofproducing18lawnservices?Whatistheaveragefixedcostofproducing35lawnservices?Whatistheaveragetotalcostofproducing40lawnservices?DescribetherelationshipbetweenMCandATC.(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 1 30 2 65 3 100 4 130 5 150 6 160 7 165 Choosethecorrectanswerforthefollowingmultiple-choicequestions:SupposeJanisstartingupasmallcoffeecartbusinessinfrontofCornsbuilding.VariablecostsforJan’scoffeecartbusinesswouldincludethecostofwhichofthefollowing: a. costofbuildingthecart b. costofhiringagraphicdesignertodesignherbannerforherbusiness c. costofgroundcoffee d. costoftheespressomachinesheleasedforonesemestere. 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:____________ Writetheletterofthecurvethatismostlikelytorepresentaveragefixedcost:____________ Writetheletterofthecurvethatismostlikelytorepresentaveragevariablecost:____________Writetheletterofthecurvethatismostlikelytorepresentmarginalcost:____________ 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? Inproducingthe5,000staplers,whatwasthefirm’saveragefixedcost?Inproducingthe5,000staplers,whatwasthefirm’saveragevariablecost? Inproducingthe5,000staplers,whatwasthefirm’saveragetotalcost? Whatwashefirm’seconomicprofitfortheyear? Harry'sHotdogsisasmallstreetvendorbusinessownedbyHarryHuggins.IfHarrymakes15hotdogsinhisfirsthourofbusinessandincursatotalcostof$16.50,whatishisaveragetotalcostperhotdog?Yoursmallpizzashop,BishopsPizzahasthefollowingcosts.Totaloutput

TC FC VC AFC AVC ATC MC

0 $100 10 $120 20 $140 30 $170 40 $200 50 $260 60 $360 Fillinthebelowtablebycalculatingfixedcosts,variablecosts.averagefixedcosts,averagevariablecosts,averagetotalcostsandmarginalcosts.

Fillintheblanks.Totalcostdividedbythequantityofoutputisthe______________________________________.TheaveragetotalcostisusuallyaUshapedcurvethatstartsrelatively__________________duetohigh_________________costsatlowlevelsofoutput,fallstoaminimumasoutputincreases,andthenrisesagaindueto_____________________________________.DrawyourownsketchoftheATC,AVCandMCcurves.PayattentiontotheshapesofthecurvesandthepointofintersectionbetweentheMC,AVCandATC.Alsodon’tforgettofactorinaveragefixedcostforthedistancebetweenyourAVCandATCasoutputrises.KeyTermsMatcheachtermwithitsdefinition.

A.Averagetotalcost________Costofproductionthatincreaseswiththequantityproduced;thecostofvariableinputsB.Averagevariablecost________TotalcostdividedbythequantityofoutputC.Fixedcost________ThesumoffixedandvariablecostsofproductionD.Marginalcost________VariablecostdividedbythequantityofoutputE.Totalcost________Costofthefixedinputs;expenditurethatafirmmustmakebeforeproductionstartsanddoesnotchangeregardlessoftheproductionlevelF.Variablecost________TheadditionalcostofproducingonemoreunitG.Averagefixedcost________Fixedcostdividedbythequantityofoutput

Nexttoeachstatement,writeTfortrueorFforfalse.__________1.Marginalcostwillalwaysbegreaterthanaveragevariablecost.__________2.Sunkcostsshouldbeconsideredwhenmakingeconomicdecisionsaboutfutureproduction.__________3.WhenMCishigherthanATC,ATCrises.

CostsintheLongRunWhatareeconomiesofscale?Whatarediseconomiesofscale?Howdoweobtainthelongrunaveragecostcurvefromtheshortrunaveragecostcurves?Sketchagraphofafirm’slongrunaveragecostcurveshowingeconomiesofscale,constantreturnstoscaleanddiseconomiesofscale.Labelyouraxesandthethreescaleareasonyourgraph.Thefigurebelowdepictsaveragetotalcostfunctionsforafirmthatproducesautomobiles.

Whichofthecurvesismostlikelytocharacterizetheshort-runaveragetotalcostcurveofthesmallestfactory?________________ Whichcurverepresentsthelong-runaveragetotalcost?________________Writethenameoftheaveragetotalcostcurvesthatthefirmcanoperateoninthelongrun________________Whatoutputlevelsdoesthisfirmexperiencediseconomiesofscale?AtlevelsofoutputbelowMwhattypeofreturnstoscaledoesthefirmexperience?

KeyTermsMatcheachtermwithitsdefinition.

A.Constantreturns________ThelongrunaveragecostofproducingoutputdecreasesastotaloutputtoscaleincreasesB.EconomiesofScale________Theaveragetotalcostcurveintheshortterm;showsthetotaloftheaveragefixedcostsandaveragevariablecostsC.DiseconomiesofScale________Showsthelowestpossibleaveragecostofproduction,allowingalltheinputstoproductiontovarysothatthefirmischoosingallinputsoptimallyD.Longrunaverage________Thelongrunaveragecostofproducingoutputincreasesastotaloutputcostcurve(LRAC)increasesE.Shortrunaverage________Expandingoutputdoesnotchangethelongrunaveragecostofproductioncostcurve

ExercisesonPerfectCompetitionWhenafirmhasnoabilitytoinfluencemarketpricesitissaidtobeinwhatkindofamarket?

Inacompetitivemarket,howwilltheactionsofanysinglebuyerorsellerimpactthemarketprice?Listanddescribethecharacteristicsofaperfectlycompetitivemarket.

Whywouldafirminaperfectlycompetitivemarketalwayschoosetosetitspriceequaltothecurrentmarketprice?Ifafirmsetitspricebelowthecurrentmarketprice,whateffectwouldthishaveonthemarket?

MangeroffirmX,reportsthathefacesthefollowingpriceandquantityrelationshipforhisproduct:Quantity(q)Price(P) 1 13 2 13 3 13 4 13 5 13 6 13 7 13 8 13 9 13 a)Thepriceandquantityrelationshipinthetableaboveismostlikelythatfacedbyafirmin

whattypeofmarketstructure?b)Overwhichrangeofoutputismarginalrevenueequaltoprice? c)Overwhatrangeofoutputismarginalrevenuedeclining? d)Forafirm,likefirmXinaperfectlycompetitivemarket,whattypeofrelationshipisthere

betweenthepriceofthegoodandmarginalrevenue?e)ManageroffirmXisdebatingwhetherheshoulddecreasehispricebelow$13tosellmore

units.Pleaseadvise.f)InclasswesaidthatthefirmslikefirmXinperfectcompetitionarepricetakers,itimpliesthat

iffirmXraisesitsprice,whatwillhappen?

g)IffirmXinacompetitivemarketreportstohavezeroeconomicprofit,whatcanyouinfer

aboutitsaccountingprofit?

Whenafirminacompetitivemarketproduces10unitsofoutput,ithasamarginalrevenueof$8.Whatwouldbethefirm’sprice?Choosethecorrectanswerforthefollowingmultiple-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 $10 1 9 14 2 18 19 3 27 25 4 36 32 5 45 40 6 54 49 7 63 59 8 72 70Ataproductionlevelof4unitswhatistherelationshipbetweenTRandVC?

Atwhichquantityofoutputismarginalrevenueequaltomarginalcost? Whatistheformulatocalculatetotalprofitforafirm?Canyouexpressthetotalprofitformulaintermsofperunitprofit?Whatistheruleforprofitmaximization?

TheWheelerWheatFarm,whichoperatesinacompetitivemarket,sellswheattoagrainbrokerinSeattle,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 Atwhichquantityofoutputismarginalrevenueequaltomarginalcost?

Supposeinthewheatindustry,achangeindemandresultsthewheatpricestoriseto$11.Whatshouldthewheatfarmdotomaximizeitsprofit?Supposeadecreaseindemandcausedwheatpricestodropto$5intheindustry.Whatshouldthewheatfarmdotomaximizeitsprofit?Wheelerfarm’smanagertellsyouthatthetotalrevenueislessthanvariablecostsattheirprofit

maximizingoutput.Whatwouldyouadvise?TheRoadrunnerfarm,Wheeler’soneofcompetitors,reportsthatattheirprofitmaximizing

output,thepriceisbelowaveragevariablecost.Whatwouldyouadvise? Whenwouldaprofit-maximizingfirmshutdownintheshortrun?(Writeyourexpressionintermsofoneunitofoutput)Whenwouldaprofit-maximizingfirmshutdownintheshortrun?(Writeyourexpressionintermsofqunitsofoutput)Inthelongrunallofafirm’scostsarevariable.Inthiscase,whatistheexitcriterionforaprofit-

maximizingfirm?Whenprofit-maximizingfirmsincompetitivemarketsareearningprofits,inthelongrunwhatwouldhappen?

Youwitnessednewfirmsenteringacompetitivemarket.Whatcanyouinferfortheexistingfirmsinthatmarket?Indoorknobmanufacturingindustry,youobservedthatthefirmsaremakinglosses.Inthelong

runwhatwouldhappen?Youobservedthatinthelongrun,aprofit-maximizingfirmchosetoexitamarket.Whatcanyou

inferabouttheprofitsofthisfirm?Whatsignalsthefirmstoenterorexitamarketinacompetitiveindustry?Youobservedthatfirmsareneitherenteringnorexitingthecompetitiveindustrywhere

soybeansareproduced.Listallthatyoucaninferaboutexistingfirmsdatafromthisobservation.Afirminacompetitivemarkethasthefollowingcoststructure: Output TotalCost 0 $5 1 $10 2 $12 3 $15 4 $24 5 $40 Ifthemarketpriceis$3,whatwillthisfirmdointheshortrun?Ifthemarketpriceis$3,whatwillthisfirmdointhelongrun?Ifthemarketpriceis$9,whatwillthisfirmdointheshortrun?

Ineachofthediagramsbelowthefigureontherightrepresentstheperfectlycompetitivemilkindustry.Theoneontheleftrepresentsanindividualmilkproducerinthismarket.Inalldiagramstheverticalaxisismeasuredindollars,andthehorizontalaxisrepresentsoutput.ThediagramsarelabeledA,BandC.Matchtheletterofthegraphtothecorrectscenariogivenbelow.

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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?TheshortRunCostCurvesforafirmoperatinginaperfectlycompetitivemarketaregivenbelow.

Ifthemarketpriceis$7intheperfectlycompetitiveindustry,intheshortrunhowmanyunits

willthisfirmproduce?Howmuchprofitwillitmake?Giveanexampleofapricewherethisfirmmakespositiveeconomicprofit?Giveanexampleofapricewherethisfirmmakesnegativeeconomicprofit?CanyoucalculatetheFCoftheabovefirmfromthecostcurvesdrawnabove?Describethechangesthatwouldtakeplaceinthelongruninacompetitivemarketwherefirms

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TheresidentialguttercleaningindustrycomprisesofmanyidenticalfirmsofferingthesameserviceinColumbus.Thediagramontherightrepresentstheperfectlycompetitiveguttercleaningindustry.Thelongruncostsof“WeGutGutters”,arepresentativefirmintheindustry,areshownintheleft-handpanel.

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Giventhedataabove,whatisthecurrentmarketpriceforguttercleaning?Giventhecurrentmarketprice,determinehowmanyguttercleaningserviceswill“WeGut

Gutters”provideintheshortrunifitwantstomaximizeprofit?Atthecurrentmarketpricewhatisthetotalindustryoutput?

Istheguttercleaningindustrycurrentlyinlongrunequilibrium?Ifnot,willthefirmsenterorexittheindustry?Whatwillbetheequilibriumpriceofaguttercleaningserviceinthelongrun?Inthelongrun,howmanyguttercleaningserviceswill“WeGutGutters”provide?