Chapter 11 Review
Marie's firm produces apples. Draw Marie's short-run supply curve. Why is only part of Marie's short-run supply curve the same as its marginal cost curve? Draw three points on Marie's short-run supply curve: 1) When the market price of apples is $85 a crate the firm produces 7.5 crates. Label the point 1. 2) When the market price is $51 a crate the firm produces 6 crates. Label the point 2. 3) When the market price is $37 a crate the firm either produces 5 crates or shuts down. Marie decides to produce 5 crates. Label the point 3. Draw Marie's supply curve above the shutdown point. Label it S1. Draw Marie's supply curve below the shutdown point. Label it S2.
1: (7.5, 85) 2: (6, 51) 3: (5, 37) S1: through all 3 points S2: horizontal line ON the y-axis from 0 to 37 When market price is BELOW MINIMUM AVERAGE VARIABLE COST, Marie's short-run supply curve runs along the y-axis and is not the same as the marginal cost curve.
BHP Billiton to axe 6,000 jobs The price of coal has fallen to $125 a ton from $300 a ton. BHP Billiton will cut production, lay off 6,000 workers, and close some mines for six months. (Source: FT.com, January 21, 2009) As BHP responded to the fall in price, how did its marginal cost change? What is minimum average variable cost in the mines that closed temporarily?
As BHP responded to the fall in price, its marginal cost fell from $300 a ton to $125 a ton. The minimum average variable cost in the mines that closed temporarily is between $125 a ton and $300 a ton.
Quebec losing hold over maple syrup industry to U.S. competition The Federation of Quebec Maple Syrup Producers tries to limit production and stockpiles a "strategic reserve" to keep the price of syrup high. But Quebec producers are feeling increased competition from Vermont, New York, and Maine, where market share has increased and is expected to increase further in 2017 and 2018. (Source: The Globe and Mail, April 6, 2015) If the demand for maple syrup increases, what will happen to price, quantity, and the economic profit of a producer in the short run and in the long run? The graph shows the revenue and cost curves for an individual producer in the maple syrup industry. Draw the marginal revenue curve if the price of maple syrup rises to $40 a gallon. Label it MR1. Draw a point to show the new equilibrium quantity and equilibrium price. Draw a shape that represents the economic profit or economic loss in the short run. Label it.
As a result of an increase in the demand for maple syrup, the price of maple syrup RISES. MR1: horizontal line at 40 New equilibrium quantity and equilibrium price: (600, 40) Economic profit: rectangle height 37.5 to 40 on y-axis, base 0 to 600 on x-axis. In the long run, the price of maple syrup FALLS and producers MAKE ZERO ECONOMIC PROFIT.
Brenda's Tattoos is a tattooing business in a perfectly competitive market in Lincoln. The market price of a tattoo is $22.50. The table shows Brenda's total costs. Quantity (tats per hour) Total Cost (dollars per hour) 0 20 1 45 2 60 3 80 4 105 5 135 6 170 How many tattoos does Brenda sell in an hour and what is Brenda's economic profit in the short run?
Brenda's Tattoos sells 3 tattoos an hour. In the short run, Brenda's incurs an economic loss of $12.50 an hour.
Mink farming is a perfectly competitive industry and all mink farms have the same cost curves. When the market price is $28 a mink, farms maximize profit by producing 1,000 mink a week. At this output, average total cost is $26 a mink, and average variable cost is $16 a mink. Minimum average variable cost is $11 a mink. If the price falls to $26 a mink, will a mink farm produce 1,000 mink a week?
If the price falls to $26 a mink, a mink farm will produce fewer than 1,000 mink a week.
How is price and quantity determined in a perfectly competitive market? How is economic profit calculated?
In a perfectly competitive market in short-run equilibrium, market supply and market demand determine the price and quantity bought and sold in the market. When a firm makes an economic profit in the short run, it is calculated as market price minus average total cost, multiplied by the quantity produced.
Which of the following statements describes a firm in a perfectly competitive market?
In a perfectly competitive market, each firm is a price taker and produces the quantity that maximizes its profit in both the short run and the long run.
Poinsettia growing is a perfectly competitive industry and all poinsettia growers have the same cost curves. The market price of poinsettias is $5 a pot and each grower maximizes profit by producing 300 pots a week. The average total cost of producing poinsettias is $11 a pot. Minimum average variable cost is $3 a pot, and the minimum average total cost is $7 a pot. In the long run, what is the price and the poinsettia grower's economic profit?
In the long run, the market price of poinsettias is $7 a pot. In the long run, a poinsettia grower's economic profit is $0.
The graph shows the short-run cost curves of a toy producer. The market has 1,000 identical toy producers. At a market price of $21 a toy, what quantity does the firm produce in the short run and does the firm make a positive economic profit, a zero economic profit, or an economic loss?
In the short run, the firm produces 2000 toys a week. The firm makes a positive economic profit in the short run.
California plans to crack down on the use of fumigants by growers of strawberries. The biggest burden will fall on Ventura County's growers, who produce about 90 percent of the nation's crop. On the graph, show the long-run effects of the pollution crackdown. The graph shows a strawberry grower in the short run after the the crack down on the use of fumigants. Average total cost exceeds price, and strawberry growers incur an economic loss. Draw the MR curve when the market moves to its long-run equilibrium. Label it MR1. Draw a point at the new long-run equilibrium price and quantity.
MR1: horizontal line at 2 New long-run equilibrium price and quantity: (8,2)
The table shows the demand schedule for Meg's Nails. What is Meg's marginal revenue for each quantity demanded? Compare Meg's marginal revenue and price. In what type of market does Meg's Nails operate? Price (dollars per box) Quantity demanded (boxes per day) 25 0 25 1 25 2 25 3 25 4 25 5 25 6
Meg's marginal revenue for each box of nails demanded is $25. Meg's marginal revenue EQUALS the price. Meg's nails operates in a market called PERFECT COMPETITION.
Omar is a tomato farmer and the world tomato market is perfectly competitive. The market price is $22 a basket. Omar sells 600 baskets a week and his marginal cost is $27 a basket. Is Omar maximizing profit? Why or why not?
Omar is not maximizing profit because marginal cost is greater than marginal revenue.
Joe's Shiny Shoes is a firm that operates in a competitive market. The graph shows Joe's marginal cost curve and average variable cost curve. What curve segment is part of Joe's supply curve?
The curve segment CD is part of Joe's supply curve.
Big drops in prices for crops make it tough down on the farm Grain prices have become more closely tied to oil prices because of the expansion of the corn-based ethanol industry. (Source: USA Today, October 23, 2008) What is the effect of the falling oil price on the market for ethanol? If the price of oil remains low for some years, what will be the long-run effects on the market for ethanol and the number of ethanol producers? The graph shows an ethanol producer's short-run equilibrium. Draw a point to show the quantity of ethanol the firm produces and the price. Label it 1. Suppose that the falling oil price changes the market price of ethanol by 25 cents a gallon. Draw the producer's new marginal revenue curve. Label it MR1. Draw a point to show the new quantity of ethanol produced and the price. Label it 2. Draw a shape that represents the producer's economic loss. Label it.
The falling oil price LOWERS the price of ethanol. If the price of oil remains low for some years and ethanol producers are incurring an economic loss, then in the long run some producers will exit the market, supply will decrease, and the price will rise. Point 1: (50, 1.00) MR1: horizontal line at 0.75 Point 2: (30, 0.75) Economic loss: rectangle height from 0.75 to 1.25 on the y-axis, base from 0 to 30 on the x-axis
Consider the markets for napkins, shampoo, dog food, vitamins, and air travel in a town serviced by one airline. In what type of market is each good or service sold?
The market in which the firms that sell napkins operate is PERFECT COMPETITION. The firms that sell shampoo operate in MONOPOLISTIC COMPETITION. Firms that sell dog food operate in AN OLIGOPOLY. Producers of vitamins operate in MONOPOLISTIC COMPETITION. Air travel in a town serviced by one airline is an example of a MONOPOLY.
Rose growing is perfectly competitive and all growers have the same costs. The market price is $17 a bunch and each grower maximizes profit by producing 2,900 bunches a week. Average total cost is $13 a bunch and average variable cost is $7 a bunch. Minimum average variable cost is $3 a bunch. What is the price at the grower's shutdown point?
The price at the grower's shutdown point is $3 a bunch.
California's commercial drone industry is taking off Customers are finding ever more creative ways to use drones, and 3D Robotics Inc., America's largest producer of consumer drones, expects sales to soar. (Source: Los Angeles Times, June 13, 2015) What is happening in the market for commercial drones? How would you expect the price of a drone and the economic profit of a drone producer such as 3D Robotics to change in the short run and in the long run?
The demand for drones is increasing in the short run. In the short run, the equilibrium price of a drone rises and the economic profit of drone producers increases. In the long run, entry of new drone producers lowers the price of a drone, and drone producers make zero economic profit.
At the shutdown point, the firm _______.
incurs a loss equal to total fixed cost.
Perfect competition is a market in which there are _____ firms, each selling _____ product; many buyers; _____ to the entry of new firms into the industry; no advantage to established firms; and buyers and sellers _____ about prices.
many; identical; no barriers; are well informed
A firm will shut down in the short run if at the profit-maximizing quantity, ______.
marginal revenue is less than average variable cost.
