Chapter 9

Suppose demand for a good is Qd=100-P and supply is Qs=-20+P. What is the amount the consumers pay producers?

Revenue = P x Q R = 60 X 40 R = 2400

Suppose there are 100 firms each with a short run total cost of STC=q^2 + q + 10, so that marginal cost is MC = 2q+1. The market supply curve is:

SR Supply Curve for each firm: q=0.5(P-1) For 100 firms: Qs=100(.5)(P-1) Qs=50(P-1) Qs=-50+50P

Suppose there are 100 firms each with a short run total cost of STC=q^2 + q + 10, so that marginal cost is MC = 2q+1. If market demand is given by Qd=1050-50P, what is the equilibrium price:

Set Demand equal to Supply and solve: Qd=Qs 1050-50P = -50+50P 1100 = 100P P= 11

Suppose demand for a good is Qd=100-P and supply is Qs=-20+P. What is the equilibrium price?

Set Qd=Qs and solve for P. 100-P = -20+P 120 = 2P P = 60

In the short run

existing firms may change the quantity they are supplying

In the short run, an increase in market demand will usually lead to an

increase in price and an increase in quantity

A tariff imposed on a good imported into the domestic market will create which of the following consequences

lead to an increase in producer surplus

When firms have an incentive to exit a competitive market, their exit will

raise the profits of the firms that remain the market

When prices drop in response to a decline in demand for an increasing cost industry

rent earned by elastically supplied inputs will decline by less than rent earned by inelastically supplied inputs

In the short run, the incidence of a sale tax is

shared between the consumer and the producer

Suppose domestic beef producers face demand QD=1000-5p. Suppose the Chinese acquire a taste for US Beef such that their demand is Qd=500-5P. Market demand is now:

1000-5P for P > 1000 and 1500-10P for P < 100

Suppose demand for a good is Qd=100-P and supply is Qs=-20+P. What is the value the consumers place on the amount of the good they consume?

3200 *****

Graph 14-4: At which price range will the firm continue to operate in the short run but earn negative profits?

Any price higher than P2 but less than P3

Suppose demand for a good is Qd=100-P and supply is Qs=-20+P. What is the consumer surplus?

Consumer Surplus: Qd x Qs =(Qd)(Qs) =(40)(40) =800

Quotas that limit the quantity of imports of a foreign good provide an incentive for foreign suppliers to

I and II Provide higher quality goods Seek more open markets elsewhere

Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur?

I and III New firms will enter the market In the long run, all firms will be producing at their efficient scale

Graph 14-4: The firm will earn positive economic profits if the price is

I only (P4)

If firms are competitive and profit maximizing, the price of a good equals the

Marginal Cost of Production

Graph 14-5: Firms would be encouraged to enter this market for all price that exceed

P4

Graph 14-2: Which of the four prices correspond to a firm earning positive economic profits in the short run?

Pa (above market price Pb earns positive profits)

Graph 14-2: Which of the four prices corresponds to a firm earning zero economic profits in the short run?

Pb

Suppose there are 100 firms each with a short run total cost of STC=q^2 + q + 10, so that marginal cost is MC = 2q+1. The short-run supply curve for each firm is:

Perfect Competition: P=MC. Set Price equal to MC and solve: P=2q+1 P-1=2q q=P-1/2 q=0.5(P-1)

Suppose demand for a good is Qd=100-P and supply is Qs=-20+P. What is the equilibrium quantity?

Plug in Price for Qd: P=60 Qd = 100 - P Qd = 100-60 Qd = 40

Suppose there are 100 firms each with a short run total cost of STC=q^2 + q + 10, so that marginal cost is MC = 2q+1. If market demand is given by Qd=1050-50P, how much will be produced in that market:

Plug in price to Market demand: Qd=1050-50P Qd-1050-50(11) Qd=1050-550 Qd=500

Suppose there are 100 firms each with a short run total cost of STC=q^2 + q + 10, so that marginal cost is MC = 2q+1. If market demand is given by Qd=1050-50P, how much will each individual firm produce?

Plug in price to S-R Supply Curve: q=0.5(P-1) P=11 q=0.5(11-1) q=5

Suppose domestic beef producers face demand QD=1000-5p. In the very short run 500 head of beef are produced. Suppose mad cow strikes a portion of the national herd and the amount brought to the market falls to 400. The price per head will rise by:

Solve for P given both quantities, then take the difference: 500=1000-5P 400=1000-5P P=100 P=120 120-100 = 20 =20

The exit of existing firms from a competitive market will

decrease market supply and increase market price

In the opening of free trade, if world prices of a good are less than domestic prices of that same good

domestic prices will drop to the world price level

Who benefits from protectionism?

domestic producers

When new firms enter a perfectly competitive market

existing firms may see their costs rise if more firms compete for limited resources

Graph 14-4: When price rises from P2 to P3, the firms finds that

expanding output to Q4 would leave the firm with losses

Firms in long-run equilibrium in a perfectly competitive industry will produce at the low points of their average total cost curves because

firms maximize profits and free entry implies that maximum profits will be zero

Under perfect competition, if an industry is characterized by positive economic profits in the short run

firms will enter the market in the long run, and the short-run supply curve will shift outward

If a 1% increase in price leads to a .7% increase in quantity supplied in the short run, the short-run supply curve is

inelastic

A tariff imposed on a good imported into the domestic market will create which of the following consequences

lead to a decrease in economic efficiency

The introduction of free trade where the world price of a good is less than the existing domestic price of a good will create which of the following conditions

lead to an increase in consumer surplus

Positive economic profits exist for a firm in the long run if price is above

long-run average cost

If the market supply for hula hoops is characterized by a very inelastic supply curve and a very elastic demand curve, an inward shift in the supply curve would be reflected primarily in the form of

lower output

If the market for bottled spring water is characterized by a very elastic supply curve and a very inelastic demand curve, an outward shift in the supply curve would be reflected primarily in the form of

lower prices

When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive profit, this task is accomplished by producing the quantity at which price is equal to

marginal cost

In the short run, a firm's supply curve is equal to the

marginal cost curve above its average variable cost curve

A deadweight loss of consumer and/or producer surplus occurs when

mutually beneficial transactions cannot be completed

Suppose demand for a good is Qd=100-P and supply is Qs=-20+P. Suppose that a nationwide quota (of 20) is enforced so that more can be used in a war effort. What is the price?

p=60 +20 =80

In the long run, the greater burden of a specific tax will usually be absorbed by the

party with the last elastic demand/supply curve

Long-run elasticity of supply is defined as

percentage change in quantity supplied in the long run divided by percentage change in price

For an increasing cost industry, the long-run supply curve has an elasticity of supply

positive

A demand curve will shift out for any of the following reasons EXCEPT:

price of a substitute falls

The intersection of a firm's marginal revenue and marginal cost curves determine the level of output at which

profit is maximized

If there is an increase in market demand in a perfectly competitive market, then in the short run

profits will rise

In the very short run

quantity supplied is absolutely fixed

The short run market supply curve in a perfectly competitive industry

shows the total quantity supplied by all firms at each possible price

One way to minimize the deadweight loss resulting from a specific tax is to

tax goods for which either supply or demand is inelastic

One example of Ricardian Rent is

the difference between the wage of a star baseball player and what he could earn outside of baseball

The short-run market supply curve is

the horizontal summation of each firm's short-run supply curve

In a competitive market, an efficient allocation of resources is characterized by

the largest possible sum of consumer and producer surplus

The excess burden of tax is

the loss of consumer and producer surplus that is not transferred elsewhere

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In long-run equilibrium, market price is determined by

the minimum point on the firms' average total cost curve

Graph 14-2: If the market price is Pb, in the short run the firm will earn

zero economic profit

Profit maximizing firms in competitive industries with free entry and exit face a price equal to the lowest possible

average total cost of production

When a quota/trade barrier is instituted, the loss of domestic consumer surplus may be transferred to all of the following except

consumers of other domestic products