Mircro 12
A student argues: "To maximize profitLOADING..., a firm should produce the quantity where the difference between marginal revenueLOADING... and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." Part 2 Is the above statement true or false?
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
Briefly discuss the difference between these two concepts.
Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
If the market demand curve shifts to the right, how will a competitive firm's level of output change?
The firm will increase its output, and its profits will increase.
What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?
Price is equal to both average revenue and marginal revenue.
Which of the following best represents total profit?
the shaded rectangle
In 2017, Apple reported that since its iTunes App Store had opened in 2008, third-party app developers had earned more than $60 billion and currently employed 1.4 million people. Yet, as we've seen, because of intense competition, many game developers can only break even on the games they develop. Source: Tripp Mickle, "Apple's App Store Sales Top $28 Billion," Wall Street Journal, January 5, 2017. Part 2 If game companies can only break even on the mobile games they develop, in the long run, we would expect them to
C. continue to develop mobile games because they can cover all costs of production if they break even.
Frances sells pencils in the perfectly competitive pencil market. Her output per day and costs are seen in the table to the right. Part 2 a. If the current equilibrium price in the pencil market is $1.60, what price will Frances charge?
$1.60
The figure to the right represents the cost structure for a perfectly competitive wheat farmer with her average total cost (ATC) curve and marginal cost (MC) curve. Part 2 At what market price will the wheat farmer break even? Part 3 The wheat farmer will break even at a price of $
$5 per bushel - where MC = ATC
Refer to the graph to the right of the costs for a perfectly competitive firm. Which of the following best represents profit per unit of output?
-might be different graph - The distance between points A and B
1. How many inches are in one foot? 2. There are __ innings in a typical baseball game. 3. The sun revolves around the earth. 4. 3×(4+ 1)=
1. 12 2. nine 3. False 4. 15
A columnist for the Wall Street Journal discussed how some firms were buying existing drilling operations in Canadian oil sands regions. These operations would not be profitable to build from scratch but were profitable to operate given that they were already built because, as the columnist said: "The key is the distinction between fixed and variable costs. While the fixed investment in new oil sands projects is prohibitive, variable costs can be in the low $20 range (say, $21) per barrel." The columnist estimated that the fixed cost of a new oil sands drilling operation could be $95 per barrel. At the time the column was written, the price of oil was about $50 per barrel.
50- 95 - 21 = -66
Suppose an assistant professor of economics is earning a salary of $75,000 per year. One day she quits her job, sells $110,000 worth of bonds that had been earning 5 percent per year, and uses the funds to open a bookstore. At the end of the year, she shows an accounting profit of $87,500 on her income tax return.
7000
Long-run equilibrium in perfect competition results in
A. allocative efficiency. B. productive efficiency. -both a and b
How does perfect competition lead to allocative and productive efficiency? Part 2 Perfect competition leads to allocative and productive efficiency
A. because prices reflect consumer preferences. B. because firms are motivated by profit. -both a/b
Suppose that the market for gluten-free spaghetti is in long-run equilibrium at a price of $3.50 per box and a quantity of 4 million boxes sold per year. Assume that the production of gluten-free spaghetti is a constant-cost industry. If the demand for gluten-free spaghetti increases permanently, which of the following combinations of equilibrium price and equilibrium quantity would you expect to see in the long run? a. A price of $3.50 per box and a quantity of 4 million boxes. b. A price of $3.50 per box and a quantity of more than 4 million boxes. c. A price of more than $3.50 per box and a quantity of more than 4 million boxes. d. A price of less than $3.50 per box and a quantity of less than 4 million boxes.
After demand increases, and supply increases, the quantity will be more than 4 million boxes, but the price will return to its initial level.
Suppose that, at the beginning of the year, the price of corn is $3.80 per bushel and 14 billion bushels are harvested. There are approximately 400,000 corn farmers, so the average output per farmer is about 35,000 bushels.
At the beginning of the year, the average corn farmer produced .00025% of the total corn production.
Which of the following best explains why firms don't maximize revenue rather than profit?
At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized.
What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?
A firm's marginal cost curve is equal to its supply curve for prices above average variable cost.
As production of laptop displays increases, firms in the industry can now enjoy economies of scale. In the short run, makers of laptop displays will what?
Be able to earn economic profit.
Why are consumers so powerful in a market system?
Because it is consumers' demand that influences the market price and dictates what producers will supply in the market.
When are firms likely to enter an industry? When are they likely to exit?
Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry.
Suppose you read the following item in a newspaper article, under the headline "Price Gouging Alleged in Pencil Market": Consumer advocacy groups charged at a press conference yesterday that there is widespread price gouging in the sale of pencils. They released a study showing that whereas the average retail price of pencils was $1.00, the average cost of producing pencils was only $0.50. "Pencils can be produced without complicated machinery or highly skilled workers, so there is no justification for companies charging a price that is twice what it costs them to produce the product. Pencils are too important in the life of every American for us to tolerate this sort of price gouging any longer," said George Grommet, chief spokesperson for the consumer groups. The consumer groups advocate passage of a law that would allow companies selling pencils to charge a price no more than 20 percent greater than their average cost of production. Part 2 Which of the following is not likely to happen in the pencil market?
Firms will charge a price above marginal cost in the long run.
What will happen in the laptop market in the long run?
Firms will enter the market.
Which of the graphs above best depicts an industry in which the typical firm's average costs decrease as the industry expands production?
Graph on left (downward sloping)
In situation 1, the firm should
In situation 1, TC = $(5,000 + 5,000) = $10,000 ATC = $10,000/ 1,000 = $10 Since Price = ATC, firm will break-even. produce 1,000 units of output and break even with a price of $10.00.
In situation 2 , the firm should
In situation 2, TC = $(6,000 + 5,000) = $11,000 AVC = $5,000 / 1,000 = $5 ATC = $11,000/ 1,000 = $11 produce 1,000 units of output at a loss since the price is less than the average total cost.
In situation 3, the firm should
In situation 3, TC = $(5,000 + 11,000) = $16,000 AVC = $11,000 / 1,000 = $11 ATC = $16,000/ 1,000 = $16 shut down since the price is less than the average variable cost.
A student examines the graph to the right and argues, "I believe that a firm will want to produce at Q1, not Q2. At Q1, the distance between price and marginal cost is the greatest. Therefore, at Q1, the firm will be maximizing its profits." Part 2 Is the student's argument correct or incorrect?
Incorrect. Profits are maximized at the quantity where marginal revenue equals marginal cost.
Is the following statement correct or incorrect? "According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this can't be true: When the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the quantity of wheat demanded rises. Therefore, the demand for wheat is not a horizontal line." Part 2
Incorrect. The commentator is confusing the market demand for wheat with the demand line facing the representative firm.
How can GE best maximize its profit?
Increase revenues and cut costs.
Which of the following statements is true when the difference between TR and TC is at its maximum positive value?
MR = MC Slope of TR = Slope of TC -BOTH A and B are true
If next week the equilibrium price of desk lamps drops to $30, should Edward shut down?
No because price is greater than minimum AVC.
Hedrick Smith was a foreign correspondent for the New York Times who lived in the Soviet Union in the 1970s, a period when the country had a planned economy rather than a market system. In a book he wrote about everyday life in the Soviet Union, Smith made the following observations about shopping in Moscow: At first it seemed...that the stores were pretty well stocked. Only as we began to shop in earnest...did the Russian consumer's predicament really come through to me. First, we needed textbooks for our children...and found that the sixth-grade textbooks had run out.... We tried to find ballet shoes for our 11-year-old daughter...only to discover that in this land of ballerinas, ballet shoes size 8 were unavailable in Moscow.... I tried to find shoes for myself. They were out of anything in my size but sandals or flimsy, lightweight shoes that the clerk, with one look at me, recommended against buying. "They won't last," he admitted. Source: Hedrick Smith, The Russians, New York: Ballantine Books, 1977, p. 77. Judging by Smith's observations, did the Soviet Union achieve allocative efficiency in the production of sixth-grade textbooks, ballet shoes, and men's shoes? Briefly explain.
No, it did not achieve allocative efficiency because the marginal benefit was greater than the marginal cost of production.
By 2017, McDonald's had stopped selling Chicken McNuggets and other products made from chickens fed antibiotics. The change increased McDonald's costs, but an article in the Wall Street Journal noted that "...McDonald's ability to raise its prices is limited because of stiff competition." Source: David Kesmodel, Jacob Bunge, and Annie Gasparro, "McDonald's to Curb Antibiotics in Chicken," Wall Street Journal, March 4, 2015. Does this "stiff competition" mean that the demand curve for McDonald's Chicken McNuggets is horizontal? Briefly explain.
No, the demand curve is not horizontal because Chicken McNuggets are not identical to other chicken products.
"In a perfectly competitive market, in the long run consumers benefit from reductions in costs, but firms don't." Don't firms also benefit from cost reductions because they are able to earn greater profits?
No. Because short-run profits encourage entry, firms earn zero economic profit in the long run.
Which of the following is an expression of profit for a perfectly competitive firm? Part 2 Profit for a perfectly competitive firm can be expressed as
Profit=(P×Q)−(ATC×Q), where P isprice, Q isoutput, and ATC is average total cost.
A perfectly competitive firm is losing money in the short run, and its price is less than its average variable cost. In order to minimize its losses in the short run, this firm should
Shut down
The financial writer Andrew Tobias has described an incident when he was a student at Harvard Business School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent hours preparing their answers and came to class carrying many sheets of paper with their calculations. When his professor called on him in class for an answer, Tobias stated, "The case said the XYZ Company was in a very competitive industry . . . and the case said that the company had all the business it could handle." Source: Andrew Tobias, The Only Investment Guide You'll Ever Need, San Diego: Harcourt, 2005, pp. 6-8. Part 2 Given this information, what price do you think Tobias argued the company should charge? (Tobias says the class greeted his answer with "thunderous applause.")
The Market price
Can we tell from these observations whether the Soviet Union achieved productive efficiency in the production of sixth-grade textbooks, ballet shoes, and men's shoes? Briefly explain.
The Soviet Union may or may not have achieved productive efficiency, depending on average costs.
Refer to the graph to the right of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the following?
The firm can sell any amount of output as long as it accepts the market price of $7.00.
If a perfectly competitive firm is producing at point A, in the graph to the right, which of the following is true?
The firm earns zero economic profit.
Why are firms willing to accept losses in the short run but not in the long run?
There are fixed costs in the short run but not in the long run.
In the figure to the right, Sacha Gillette reduces her output from 7750 to 5750 dozen eggs when the price falls to $2.20. At this price and this output level, she is operating at a loss. Part 2 What option does Gillette have in this situation?
Try to cut her costs of production to decrease the loss in the short run.
At a price of $50 per barrel, were the companies buying the existing oil sands operations earning a profit of $29 per barrel? If not, explain what information we would need to calculate their profit
We would need information on the cost of buying the existing operations to determine profits.
The chapter states, "Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them." A student objects to this statement by making the following argument: "I doubt that firms will really do this. After all, firms are in business to make a profit; they don't care about what is best for consumers." Part 2 After reminding the class that we are assuming a competitive market, your professor would most likely give the following reply
While it's true that firms don't care about consumer welfare, they do maximize profits by producing the efficient level of output.
Why do single firms in perfectly competitive markets face horizontal demand curves?
With many firms selling an identical product, single firms have no effect on market price.
In perfect competition, long-run equilibrium occurs when the economic profit is
Zero
A price taker is
a firm that is unable to affect the market price.
Discuss the shape of the long-run supply curve in a perfectly competitive market. Part 2 The long-run supply curve is
a horizontal line equal to the minimum point on the typical firm's average total cost curve.
A buyer or seller that is unable to affect the market price is called
a price taker
Refer to the graphs above. What do you expect to happen in this market as it approaches long-run equilibrium?
a shift to the right of the market supply curve as new firms enter
Which of the following terms best describes a state of the economy in which production reflects consumer preferences?
allocative efficiency
What is the difference between a firm's shutdown point in the short run and its exit point in the long run? In the short run, a firm's shutdown point is the minimum point on the
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.
How is the market supply curve derived from the supply curves of individual firms? The market supply curve is derived
by horizontally adding the individual firms' supply curves.
In the short run, the firm should
continue to produce because price is greater than average variable cost.
An article in the Wall Street Journal discussing the financial results for General Electric Co. (GE) for the first quarter of 2017 reported that, compared with the same quarter in the previous year, the firm's revenue had fallen from $27.94 billion to $27.66 billion, while its profit had increased from $228 million to $653 million. Source: Thomas Gryta and Joshua Jamerson, "General Electric, Still Weighed by Energy, Boosts Profit amid Cost Cutting Plan," Wall Street Journal, April 21, 2017. It is possible for profits to increase even if revenue decreases if
costs decrease more than revenue decreases.
The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Part 2 Suppose the market price is $16.00 per unit. Will firms enter or exit the industry in the long run? Part 3 If market price is $16.00, then firms will enter the market in the long run.
enter
The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Part 2 Suppose the market price is $15.00 per unit. Will firms enter or exit the industry in the long run? Part 3 If market price is $15.00, then firms will
enter the market in the long run
The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Fixed costs are $50.00. Part 2 Suppose the market price is $23.00 per unit. Part 3 Characterize the firm's profit. Part 4 If the firm produces output, then it will
experience losses
Explain why it is true that for a firm in a perfectly competitive market that P = MR = AR. Part 2 In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price.
In a perfectly competitive industry with constant costs, the long-run supply curve will be
horizontal.
In situation 1, the firm should
https://www.chegg.com/homework-help/questions-and-answers/consider-firm-following-three-situations-explain-whether-firm-produce-short-run-shut-short-q24504554
As of 2017, the U.S. Department of Agriculture (USDA) did not have detailed guidelines for egg farmers to follow before they could claim that the eggs they sell were laid by cage-free chickens. Some animal rights activists were pushing for the USDA to enact stricter guidelines than many egg farmers were following voluntarily. Such guidelines would be likely to significantly raise the cost of producing cage-free eggs. Suppose that the USDA begins to require these stricter guidelines. What effect will this increase in cost have on the long-run price of cage-free eggs? In the long run, will the quantity of cage-free eggs be larger, smaller, or the same as it would have been without the USDA adopting the guidelines? Briefly explain. With the stricter guidelines, other things equal, the market price of cage-free eggs would -- as the minimum long-run average cost-- At the new market price, the long-run equilibrium quantity will be
increase, increase, smaller
What is meant by allocative efficiency? Part 2 Allocative efficiency is when every good or service
is produced up to the point where the marginal benefit for consumers equals the marginal cost of producing it.
What conditions make a market perfectly competitive? Part 2 A market is perfectly competitive if
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... [is] that it is unrealistic." Source: George Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy, Vol. 55, No. 1, (February 1957), pp. 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
Because the price of laptops falls in the long run as output increases, what is true about this industry?
it is a decreasing cost industry
When are firms likely to be price takers? A firm is likely to be a price taker when
it sells a product that is exactly the same as every other firm, represents a small portion of total market
If a firm decided to maximize revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing profit? The firm would produce a
larger quantity of output
The increase in total revenue that results from selling one more unit of output is
marginal revenue.
What effect will firms entering have on the market price? Part 5 When firms enter,
market supply will increase, decreasing price.
What effect will firms entering have on the market price? Part 5 When firms enter,
market supply will increase, decreasing price.
What does the shaded area in the second graph to the right represent for a perfectly competitive firm that produces at output level Q?
negative economic profit
What determines entry and exit of firms in a perfectly competitive industry in the long run? Part 2 In a perfectly competitive industry in the long run,
new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.
The following questions are about long-run equilibrium in the market for cage-free eggs. Source: Stephanie Strom, "What to Make of Those Animal-Welfare Labels on Meat and Eggs," New York Times, January 31, 2017. Part 2 As described in the chapter opener, the market for cage-free eggs in 2015 was
not in equilibrium because farmers who were raising cage-free chickens were earning higher profits than farmers who raised chickens using more traditional methods.
In 2017, two beer drinkers in California filed a lawsuit against Kona Brewing Company, which sells Kona beer. The beer drinkers claimed that Kona was marketed as if it were brewed in Hawaii, but the beer is actually brewed in Oregon, Washington, Tennessee, and New Hampshire. Source: Cameron Miculka, "Suit Alleges Misrepresentation by Kona Brewing Co. Owner," westhawaiitoday.com, March 3, 2017. If the market for beer were perfectly competitive, the location of breweries would
not matter to consumers since the product would be homogeneous.
Which of the following terms best describes the result of the forces of competition driving the market price to the minimum average cost of the typical firm?
productive efficiency
Karl's firm illustrates
productive efficiency because price equals average total cost and allocative efficiency because marginal revenue equals marginal cost.
A shortage is the amount by which the __ exceeds the __
quantity demanded ;quantity supplied
Does the market system result in allocative efficiency? Part 2 In the long run, perfect competition
results in allocative efficiency because firms produce where price equals marginal cost.
Does the market system result in productive efficiency? Part 2 In the long run, perfect competition
results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.
If the market price for wheat were indeed $5 per bushel, should the wheat farmer exit the industry in the long run? Part 5 In the long run, the wheat farmer
should continue to produce wheat because breaking even is as high a return as she could earn elsewhere.
What is the supply curve for a perfectly competitive firm in the short run? Part 2 The supply curve for a firm in a perfectly competitive market in the short run is
that firm's marginal cost curve for prices at or above average variable cost.
How should firms in perfectly competitive markets decide how much to produce? Part 2 Perfectly competitive firms should produce the quantity where
the difference between total revenue and total cost is as large as possible.
In the long run in the market for cage-free eggs, we would expect
the equilbrium price to decrease and the equilibrium quantity to increase, as more firms enter.
Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC. Part 2 When maximizing profits, MR = MC is equivalent to P = MC because
the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.
Refer to the graphs above. Suppose the graph on the left represents a typical firm's supply curve in a perfectly competitive industry, and there are 100 identical firms in the industry. What does the graph on the right represent?
the market supply curve
Suppose that the laptop computer industry is perfectly competitive and that the firms that assemble laptops do not also make the displays for them. Suppose that the laptop display industry is also perfectly competitive. Suppose that because the demand for laptop displays is currently relatively small, firms in the laptop display industry have not been able to take advantage of all the economies of scale in laptop display production. Use this information and the graphs below to answer the following questions. What happens to the price and profit of the individual laptop produced in the short run?
they both rise
AXA's actions could make economic sense in the long run if AXA's
total cost per square foot is equal to $40 or less
In a perfectly competitive industry with increasing average costs, the long-run supply curve will be
upward sloping.
According to an article in the Wall Street Journal, in 2007 the insurance company AXA Equitable signed a long-term lease on 2 million square feet of office space in a skyscraper on Sixth Avenue in Manhattan in New York City. In 2013, AXA decided that it only needed 1.7 million square feet of office space, so it subleased 300,000 square feet of space to several other firms. Although AXA is paying a rent of $88 per square foot on all 2 million square feet it is leasing, it is only receiving $40 per square foot from the firms subleasing the 300,000 square feet. Source: Molly Hensley-Clancy, "A Slump on Sixth Avenue," Wall Street Journal, June 16, 2013. AXA's actions might make economic sense in the short run if AXA's
variable cost per square foot was equal to or less than $40.
What is meant by productive efficiency? Part 5 Productive efficiency is
when a good or service is produced at lowest possible cost.
Would a firm earning zero economic profit continue to produce, even in the long run? Part 2 In long-run competitive equilibrium, a firm earning zero economic profit
will continue to produce because such profit corresponds with positive accounting profit.
Assume the market for oranges is perfectly competitive. If the demand for oranges increases, will the market supply additional oranges? Part 2 If the demand for oranges increases, then the market
will supply additional oranges because producers seek the highest return on their investments.
The graph at right represents the situation of Karl Kumquats, a kumquat grower. Karl is earning
zero economic profit, but could have a positive accouting profit.
Suppose you decide to open a copy store. You rent store space (signing a one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees and the costs of paper and utilities, doesn't cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Part 2 Should you continue operating your business?
Yes, because you are covering your variable costs.
An article in the Wall Street Journal discusses the visual effects industry, which is made up of firms that provide visual effects for films and television programs. The article notes that: "Blockbusters... often have thousands of visual effects shots. Even dramas and comedies today can include hundreds of them." But the article notes that the firms producing the effects have not been very profitable. Some firms have declared bankruptcy, and the former general manager of one firm was quoted as saying: "A good year for us was a 5% return." Source: Ben Fritz, "Visual Effects Industry Does a Disappearing Act," Wall Street Journal, February 22, 2013. What dynamics best describe the factors at play in this market? Market entry for visual effect companies is relatively
easy, so firms can expect to earn zero economic profit in the long run.
