Microeconomics HW chapter 8
The table below represents a firm's profit for producing and selling spatulas. Assume that if a firm would have the same profit at two different levels of output, then the firm would choose the greater level of output. Assume that the only levels of output that the firm can produce are the levels of output given in the table. At what level of output does the firm maximize profits? Quantity Total Cost Marginal Cost Total Rev Marginal Rev 0 $21.00 - $0.00 - 11 $34.97 $1.27 $11.00 $1.00 22 $46.96 $1.18 $22.00 $1.00 33 $54.00 $1.00 $33.00 $1.00 44 $72.92 $1.18 $44.00 $1.00 55 $100.75 $1.45 $55.00 $1.00
33 The profit-maximizing output choice for a perfectly competitive firm occurs at the level of output where marginal revenue is equal to marginal cost, or at 33 spatulas.
Dynamo Industries sold 80 packages of fireworks at a market price of $30 per package. If the firm earned a $2,000 profit, then what is the firm's average total cost?
$5 Profit=Price×Quantity - Average Total Cost×Quantity $2,000=$30×80−ATC×80 $25=$30−ATC ATC=$5
Which of the following is true about firms exiting a perfectly competitive market?
Exiting the market occurs in response to a sustained pattern of losses. Exit occurs in response to a sustained pattern of losses.
True or false?In a perfectly competitive market, there are limited amounts of buyers and sellers in the industry.
False In a perfectly competitive market, many firms produce identical products, many buyers are available to buy the product and many sellers are available to sell the product, sellers and buyers have all relevant information to make rational decisions about a product, and firms can leave the market without any restrictions.
True or false?A decrease in supply in the short-run will lead to decreased prices in the long-run.
False When demand for a product decreases, the price goes down. Existing firms must decrease production to a level where P = MR = MC. This will temporarily lower the price below the minimum point of the average cost curve, and existing firms will lose profits. This will cause them to exit the market. As they exit, supply shifts to the right, and market price starts increasing in the long run. Economic profits rise and firms begin to enter the market again.
The table shows the demand schedule for shampoo bottles faced by a firm under perfect competition. What is the marginal revenue (MR) of the 13th shampoo bottle sold by this firm (Q=13)? Shampoo Demand Schedule Quantity (Q) Price (P) 11 $3 12 $3 13 $3 14 $3 15 $3
MR = $3 Marginal revenue is the additional revenue gained from selling one more unit. In perfect competition, marginal revenue for every unit is equal to price, MR=P,. This market is perfectly competitive, which means for every sale of 1 additional bottle of shampoo sold, the firm's total revenue will increase by the market price of $3 . This can be proven with math. First calculate the total revenue for quantities of 12 and 13. Total revenue equals price times quantity. TR=P×Q When quantity is 12, total revenue is $3×12=$36. When quantity is 13, total revenue is $3×13=$39. Then solve for marginal revenue. MR=change in total revenue / change in quantity = $39 − $36 / 13 − 12 = 31 = $3
Calculate marginal revenue for this firm. Marginal Revenue in Perfect Competition Quantity Total Revenue Marginal Revenue 0 $0 - 1 $5.00 ? 2 $10.00 ? 3 $15.00 ? 4 $20.00 ? 5 $25.00 ? 6 $30.00 ? 7 $35.00 ? 8 $40.00 ?
MR = $5 Marginal revenue equals the change in total revenue divided by the change in quantity. The total revenue changed from $5 to $40 giving us a total revenue change of $35. The quantity changed from 1 to 8 giving us a quantity change of 7. Finally to solve for the marginal revenue divide 35 by 7. Marginal revenue equals $5 MR=change in total revenue / change in quantity = 40−58−1=357=$5
Consider a firm that sells lamps in a perfectly competitive market. As its sales go up from 10 lamps to 11 lamps, its total revenue increases from $500 to $550. What is the marginal revenue of this firm?
MR = 50 The marginal revenue is the increase in revenue due to sale of one additional unit. In this situation, that would be $50. MR=change in total revenue / change in quantity = 550−500 / 11−10 = 50/1 = $50 MR=$50
In a perfectly competitive market for bushels of peas, Farmer Paul is considering increasing his crop from 10 bushels to 40 bushels. What will his marginal revenue be according to the table below?
MR=change in total revenue / change in quantity = 550 - 2200 / 10 - 40 = -1650 / -30 = 55 Subtract the 40 bushel total revenue $2200 from the 10 bushel total revenue to get $1650. Then divide by the change in quantity of 30 bushels from 10 to 40. Divide the change in revenue 1650 by the change in quantity 30. Marginal revenue equals $55.
Suppose that Pointy Pen is a firm in the perfectly competitive pen industry. Pointy Pen has recently come into hard times. Looking at the graph of Pointy Pen's costs below, what is Pointy Pen's shutdown point?
P (Profit) = $8, Q (Qty) = 16 The intersection of the average variable cost curve and the marginal cost curve, which shows the price where the firm would lack enough revenue to cover its variable costs, is called the shutdown point. For Pointy Pen, their shutdown point occurs where price equals $8 and quantity equals 16.
The cost per box of markers for Firm Z to produce at the level of 500 boxes of markers is $2.50. In this perfectly competitive market the marginal revenue this firm receives for each box sold is $5. What will Firm Z's profit be for selling 500 boxes of markers?
Profit = $1250 Profit equals price minus average total cost times quantity. Marginal revenue is $5. Because the market is perfectly competitive marginal revenue equals price. MR=P thus P=$5 profit=(price-average total cost) × quantity=($5−$2.50)×500=$1250
The market price for tennis balls is currently $2 At this price, a firm is willing and able to produce 80 tennis balls. However, at this level of production, the firm experiences an average total cost of $0.50 per tennis ball. What is the profit for this firm?
Profit = Total Revenue − Total Cost = (Price)(Quantity) − (Average Cost)(Quantity)=(80)($2)−($0.50)(80) = $160 − $40 = $120
At which whole number quantity (Q) of output is profit maximized?
Profit equals total revenue minus total cost. As seen on the graph, total revenue is greater than total cost at quantity 2. Therefore profits are maximized at Q=2.
A firm estimates its average total cost at 90 units of output to be $15. If the firm can sell all of its output at a market price of $5, what is its total profit?
Profit=Total Revenue−Total Cost=(Price)(Quantity Produced)−(Average Cost)(Quantity Produced) (5)(90)-(15)(90) = 450 - 1350 = -$900 Profit=(P−ATC)∗Q=($5−$15)∗90=−$900
FIRM A's PROFIT MAXIMIZING DATA Quantity (Q) Total Cost (TC) Total Revenue (TR) 1 $7 $9 2 $15 $18 3 $22 $27 4 $29 $36 5 $40 $45 6 $52 $54 7 $67 $63 8 $76 $72 Above is a table of Firm A's total costs (TC) and total revenue (TR) at various quantities (Q). To maximize profit, at which quantity (Q) should this firm produce?
Q = 4 The profit maximizing quantity for Firm A is at quantity Q=4 where the difference between total revenue and total cost gives Firm A the greatest profit. Profit = Total Revenue - Total Cost When quantity is 4, Profit=TR-TC=$36−$29=$7 FIRM A's PROFIT MAXIMIZING DATA Qty (Q) Total Cost (TC) Total Rev(TR) Profit (P) 1 $7 $9 $2 2 $15 $18 $3 3 $22 $27 $5 4 $29 $36 $7 5 $40 $45 $5 6 $52 $54 $2 7 $67 $63 −$4 8 $76 $72 −$4
Calculate the profits for company Econislife based on the figures in the table below. What is the profit-maximizing level of output? What is the profit at this quantity? Econislife Total Revenue and Total Cost Quantity (Q) Total Revenue (TR) Total Costs (TC) 1 $28 $40 2 $56 $45 3 $84 $55 4 $112 $72 5 $140 $120
Q = 4 , Profit = $40 Profits equal total revenue minus total cost. The math for each profit is calculated in the chart below. The quantity with the highest level of profit is where the output is maximized. Looking in the profit column, the highest profit is at Q=4 and the profit-maximizing output is $40 Econislife Profits Qty Total Revenue Total Cost Profits (TR-TC) 1 28 40 28−40=-$12 2 56 45 56−45=11 3 84 55 84−55=$29 4 112 72 112−72=$40 5 140 120 140−120=$20
The company Econislife is deciding what output level will provide profit-maximization. According to the graph below, what level of output will maximize profit?
Q= $40 Profit is maximized when total revenue is furthest above the total cost on a graph. At an output of $40 units profit is greatest; the output of $40 maximizes profits.
Productive efficiency occurs when _______.
a perfectly competitive market is in long-run equilibrium an economy is operating on its production possibilities curve price equals minimum average total cost When an economy is operating on its production possibilities curve, we say that it is engaging in productive efficiency. Productive efficiency occurs when price equals minimum average total cost. Additionally, productive efficiency holds when a perfectly competitive market is in long-run equilibrium.
True or false?In a perfectly competitive market, the industry supply curve is equal to the marginal cost curves of the individual firms that make up that industry.
True If input costs change a firm's variable costs, its average total cost curve will reflect these changes. Any change in marginal cost produces a similar change in industry supply, which can be found by adding up the marginal cost curves for individual firms.
Is the statement below True or false?If a firm is unable to cover its fixed costs in the long-run, then the firm must exit the market.
True Inability to cover fixed costs will eventually lead to bankruptcy. While a firm can operate in a short-run loss this must improve at some point to remain in the market.
True or false?Productive efficiency occurs when price equals minimum average total cost.
True Productive efficiency occurs when price equals minimum average total cost.
True or false?In a perfectly competitive market, if firms are initially making zero profit and then the price of the good the firms sell rises, all else being equal, new firms have an incentive to enter the market.
True This statement is true. When prices and profits rise, a firm has the incentive to enter the market if there are no barriers to entry.
Which of the following are characteristics of an increasing cost industry?
all of the above. the long-run supply curve is upward sloping. an increase in demand is met with lesser increase in supply. the equilibrium price increases in response to an increase in quantity. An increasing cost industry is an industry in which the old and new firms experience increases in their costs of production as the market expands, making the new zero-profit level intersect at a higher price than before.
In a ______ industry, an increase in market demand and price will result in a rightward shift in supply, new firms will enter, and supply will stop at the point where the new long-run equilibrium intersects at the previous market price.
constant cost For a constant cost industry, whenever there is an increase in market demand and price, the supply curve shifts to the right, new firms will enter, and supply stops at the point where the new long-run equilibrium intersects at the same market price as before. In this type of industry, the supply curve is very elastic. Firms can easily supply any quantity that consumers demand.
In the graph below, what does the shaded area represent?
economic loss The rectangle represents economic loss. This is because price is less than average total cost at the profit maximizing quantity. The rectangle shape is given by the formula: Profit = (P - ATC) * Q where (P - ATC) is the height and Q gives the length.
What are two reasons a business may exit from the market?
losses made in the long-run unproductive workers A business might find itself in need of exiting a market due to domestic competition, unproductive workers, or even poor management. In the long run, firms that are facing losses will cease production altogether, which is called exit.
Consider that a market is in long-run equilibrium and demand decreases. Select two answers that will occur as a result of a decrease in demand.
market prices begin to fall market prices will fall below the average cost (AC) curve Short-run losses will fade away by reversing this process. Say that the market is in long-run equilibrium. This time, instead, demand decreases, and with that, the market price starts falling. The existing firms in the industry are now facing a lower price than before, and as it will be below the average cost curve, they will now be making economic losses. Some firms will continue producing where the new P = MR = MC, as long as they are able to cover their average variable costs. Some firms will have to shut down immediately as they will not be able to cover their average variable costs, and will then only incur their fixed costs, minimizing their losses. Exit of many firms causes the market supply curve to shift to the left. As the supply curve shifts to the left, the market price starts rising, and economic losses start to be lower. This process ends whenever the market price rises to the zero-profit level, where the existing firms are no longer losing money and are at zero profits again. Thus, while a perfectly competitive firm can earn profits in the short run, in the long run the process of entry will push down prices until they reach the zero-profit level. Conversely, while a perfectly competitive firm may earn losses in the short run, firms will not continually lose money. In the long run, firms making losses are able to escape from their fixed costs, and their exit from the market will push the price back up to the zero-profit level. In the long run, this process of entry and exit will drive the price in perfectly competitive markets to the zero-profit point at the bottom of the AC curve, where marginal cost crosses average cost.
Which of the following are characteristics of a perfectly competitive market?
there are many buyers and sellers firms can enter and exit the market with no restrictions In a perfectly competitive market, many firms produce identical products, many buyers are available to buy the product and many sellers are available to sell the product, sellers and buyers have all relevant information to make rational decisions about a product, and firms can leave the market without any restrictions.
