Micro - Lecture 7 (33001)

In New York, there are two different licensing systems for hot dog vendors. Vendors outside of parks and major attractions (i.e. the Metropolitan Museum) purchase permits at auction from the Parks Department. Vendors elsewhere purchase permits for a fixed price from the city. Assume for this example that the only costs faced by vendors are rent, any tickets for parking their cart in an illegal zone, and hot dogs. These costs are outlined in the table below. Roving street cart Rent/permit costs = $200/yr Tickets for illegal parking = $5000/yr Hot dog wholesale cost (including bun) = $0.40 Price of a hot dog on the street is $1.00. Assume that hot dog selling is a competitive industry (the prices above are competitive prices), so all vendors make zero profits. How many hot dogs are sold by each roving street cart per day?

23.7

In New York, there are two different licensing systems for hot dog vendors. Vendors outside of parks and major attractions (i.e. the Metropolitan Museum) purchase permits at auction from the Parks Department. Vendors elsewhere purchase permits for a fixed price from the city. Assume for this example that the only costs faced by vendors are rent, any tickets for parking their cart in an illegal zone, and hot dogs. These costs are outlined in the table below. Outside of Met Rent/permit costs = $362.2k/yr Hot dog wholesale cost (including bun) = $0.40 Price of a hot dog outside the Met is $2.00. Assume that hot dog selling is a competitive industry (the prices above are competitive prices), so all vendors make zero profits. How many hot dogs are sold by each cart per day outside the Met?

620.2 hot dogs.

TRUE, FALSE or UNCERTAIN: My father claims that the price of hot dogs is higher outside of the Met because looking at art and hot dogs are complements, so demand is higher in that area.

FALSE. It may be that hot dogs and art are not complements, which would make this obviously wrong. However, even if they are complements, which would increase demand, this will only have an effect on the price if the supply of hot dogs is limited. Ultimately, the fact that the price is higher is driven by the supply restrictions, not by demand conditions.

A good is produced by a constant-cost industry. Market demand for the good is: Qd(P) = 85 - 3P. The long-run total costs for each firm in the industry are given by: Output Total Cost 0 1 1 24 2 40 3 48 4 60 5 80 6 108 7 140 8 176 Now assume the government decides that only the firms currently in the industry should be allowed to compete in the industry. These firms receive licenses to produce the good. No other firms may enter the industry. By itself, the licensing does not change the long-run equilibrium in the industry. To illustrate the impacts of licensing, consider what happens if the demand curve shifts out to: Qd(P) = 144 - 3P. How high would price have to be to get each firm to produce 5 units? To produce 6 units? To produce 7 units?

Firms produce when P = MC. To produce 5 units, price needs to be 20 per unit. To produce 6 units, price needs to be 28 per unit. To produce 7 units, price needs to be 32 per unit.

Each firm in a competitive market has a cost function of C=16+q^2. The market demand function is Q=24-p. Determine the equilibrium price, quantity per firm, market quantity and number of firms.

In the long run, two things will be true: price = MC and Profit = 0. n = 4, q = 4, Q = 16, and p = 8

A good is produced by a constant-cost industry. Market demand for the good is: Qd(P) = 85 - 3P. The long-run total costs for each firm in the industry are given by: Output Total Cost 0 1 1 24 2 40 3 48 4 60 5 80 6 108 7 140 8 176 Now assume the government decides that only the firms currently in the industry should be allowed to compete in the industry. These firms receive licenses to produce the good. No other firms may enter the industry. By itself, the licensing does not change the long-run equilibrium in the industry. To illustrate the impacts of licensing, consider what happens if the demand curve shifts out to: Qd(P) = 144 - 3P. Denote the prior three prices as P5, P6, and P7. Which of these is the new market-clearing price?

The market-clearing price is that which makes Qs = Qd. This only occurs at a price of 28. At this price, each firm produces 6, with an industry output of 60 units.

Should a competitive firm ever produce when it is losing money? Why or why not?

The shutdown rule states that a firm should shut down when it can avoid additional losses by doing so. This occurs when losses would exceed fixed costs. IF the firm can cover any portion of fixed costs by continuing production it should do so.

Suppose I told you that a regular hot dog cart sells 50 hot dogs per day. Can you rationalize this? (hint: think to the example in class)

This fact is puzzling because this would imply positive profits, and it seems that this should be a competitive industry. There are a couple of options. First, since the number of licenses for operating as a roving cart is limited, there may be rents gained to those who own them. Second, it is possible (even likely) that the actual license costs are much higher than $200, because people must purchase them through the black market.

Over some range of quantities, it is thought that the supply curve of automobiles slopes down. Industries with this characteristic are called "decreasing cost". Describe using words and (ideally) pictures what features of the industry would produce this pattern.

To get this, it must be the case that an increase in demand shifts cost curves down. The opposite of what happens in an increasing cost industry. The simplest way to have this -- which is what is likely going on in autos -- is if there are some economies of scale in producing an input. In the car case it's probably brakes, or batteries, or engines, many of which auto producers get from intermediate sources. Broadly, we could describe this as "economies of scale". There must be economies of scale in something. In this case, it's probably in the inputs rather than in the output production itself.

A good is produced by a constant-cost industry. Market demand for the good is: Qd(P) = 85 - 3P. The long-run total costs for each firm in the industry are given by: Output Total Cost 0 1 1 24 2 40 3 48 4 60 5 80 6 108 7 140 8 176 Name a) the long-run equilibrium price, b) the quantity at each firm, c) the long-run industry quantity, and d) the numebr of firms in the long run. (PS 6)

a) P = min(AC) = 15 b) q = 4 c) LR industry quantity = 85 - 3 * 15 = 85 - 45 = 40 d) number of firms in the LR = 40 / 4 = 10

Steve Levitt is the author of SuperFreakonomics. Steve works with a company, "SpeakCo", which coordinates economists like Steve to give speeches to companies, universities, etc. a. Is SpeakCo in a constant-cost or increasing cost industry? b. What happens to the profits of SpeakCo if demand for economist speakers goes up? In the short run? In the long run? c. What happens to Steve Levitt's compensation when the demand for economist speakers goes up?

a. Increasing cost. Economists (well, famous ones like Steve, at least) are a relatively fixed factor. b. In the long run, the profits will not go up. Even though the price of speakers will go up, the profits for the company will not go up since those rents will be transfered to Steve. In teh short run the firm may make positive profits since they are currently contracted with the fixed factor. c. Steve will be able to collect the rents -- he will make more money.