EOC12: End of Chapter Problems - Ch. 12: Perfect Competition and the Supply Curve

Washington state is the largest producer of apples in the United States. In 2018, farms in Washington produced 171 million bushels of apples, nearly five times more than the next highest-producing state, New York. Many apple farms in Washington depend on migrant labor from Mexico and Central America. These countries were once reliable sources of labor, but farmers are now experiencing a large shortage of labor. Most migrant workers are choosing year-round positions in the construction industry instead of the seasonal work offered in agriculture, leaving apple farms relying on undocumented migrant labor. With fewer undocumented workers, labor costs have soared, forcing many farmers to invest in expensive mechanical harvesting devices.

Firms will experience an increase in average variable costs as labor becomes more expensive. Firms will experience an increase in average fixed costs as they invest in expensive mechanical harvesting devices. Firms have to cut back on growing apples, and the market supply of apples will decrease. Firms who cannot break even due to higher production costs will exit the industry.

A recent report found that Christmas trees have doubled in price over the last three years. The price surge is partly due to a glut of trees 10 years prior. During the Great Recession of 2008 many consumers reduced their purchases, leading to a surplus of trees and lower prices. Explain how a glut in trees 10 years prior could lead to higher prices today. Focus on how farms changed operations in response to the price decrease. Please select all that help explain the increase in Christmas tree prices.

It takes seven to ten years for a Christmas tree to reach a height of six to seven feet. The demand for Christmas trees has increased in recent years due to the economic expansion. Farms suffer from losses and cut back on production or exit the Christmas tree market due to the fall in demand in 2008.

A perfectly competitive firm has the following short‑run total costs and market demand for the firm's product. Quantity | Total cost 0 | $5 1 | 10 2 | 13 3 | 18 4 | 25 5 | 34 6 | 45 Market demand for the firm's product is given by the following market demand schedule: Price | Quantity demanded $11 | 300 9 | 500 7 | 800 5 | 1,200 3 | 1,800 a. Calculate this firm's marginal costs and, for all output levels except zero, the firm's average variable cost and average total cost. Quantity | MC | AVC | ATC 1 2 3 4 5 6 b. There are 100 firms in this industry that all have costs identical to those of this firm. Plot the short-run industry supply curve (S) and the market demand curve (D). Graph: c. What is the market price? P = $ ___________________ d. How much profit will each firm earn? Profit = $ _________________

a. $5.00 | $5.00 | $10.00 3.00 | 4.00 | 6.50 5.00 | 4.33 | 6.00 7.00 | 5.00 | 6.25 9.00 | 5.80 | 6.80 11.00 | 6.67 | 7.50 b. Graph: S-Line: (2, 3), (3, 6), (4, 7), (5, 9), (6, 11) D-Line: (3, 11), (5, 9), (8, 7), (12, 5), (18, 3) c. 9 d. 11

Consider Bob's flower pot company, whose costs are described in the accompanying table. Assume that flower pot production is a perfectly competitive industry. Quantity of flower potsVC0$01,0005,0002,0008,0003,0009,0004,00014,0005,00020,0006,00033,0007,00049,0008,00072,0009,00099,00010,000150,000 a. Bob's break-even price is $ ___________ Bob's shutdown price is $ ___________ b. Suppose the price of a flower pot is $2. What should Bob do in the short run? Bob should ___________________________________ c. At a price of $7, Bob's profit-maximizing quantity is ____________ and his total profit is _______________ when producing that quantity. At a price of $7, Bob should ______________________________________ in this industry. d. At a price of $20, Bob's profit-maximizing quantity is ___________ and his total profit is _________ when producing this quantity. At a price of $20, Bob should ____________________________________ in this industry.

a. 13.83; 3 b. shut down in the short run. c. 5,000; -$35,000; produce in the short run but exit in the long run d. 7,000; $41,000; produce in the short run and the long run

The accompanying table presents prices for washing and ironing a man's shirt taken from a survey of California dry cleaners. Dry CleanerCityPriceA-1 CleanersSanta Barbara$1.50Regal CleanersSanta Barbara1.95St. Paul CleanersSanta Barbara1.95Zip Kleen Dry CleanersSanta Barbara1.95Effie the TailorSanta Barbara2.00Magnolia TooGoleta2.00Master CleanersSanta Barbara2.00Santa Barbara CleanersGoleta2.00Sunny CleanersSanta Barbara2.00Casitas CleanersCarpinteria2.10Rockwell CleanersCarpinteria2.10Norvelle Bass CleanersSanta Barbara2.15Abitt's Fine CleanersSanta Barbara2.25California CleanersGoleta2.25Justo the TailorSanta Barbara2.25Pressed 4 TimeGoleta2.50King's CleanersGoleta2.50 a. What is the average price per shirt washed and ironed in Goleta and in Santa Barbara? Averaage price in Goleta: $ _____________ Averaage price in Santa Barbara: $ ____________ b. The accompanying diagram depicts the marginal cost and average total cost curves for California Cleaners in Goleta. Place point E along its MC curve at a price and cost that would lead to California Cleaners earning an economic profit. Shade the area that depicts these profits. Graph: c. Assume $2.25 is the short-run equilibrium price in Goleta. Draw a typical short-run demand and supply curve for the market. Label the equilibrium point. Graph:

a. 2.25 2.00 b. Graph: 3 * 11 -> (0, 5), (0, 8), (11, 5), Point E: (11, 8) c. Graph: S-LIne: (2, 5), E P = $2.25 (7, 13), (10, 18) D-Line: (2, 17), (7, 13), (18, 4)

The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. This question analyzes results from a study released by the U.S. Department of Agriculture about wheat production in the United States in 2016. Round answers to two places after the decimal where necessary. a. The average variable cost per acre planted with wheat was $115 per acre. Assuming a yield of 44 bushels per acre, what is the average variable cost (AVC) per bushel of wheat? AVC: $ ______________ per bushel b. The average price of wheat received by a farmer in 2016 was $4.89 per bushel. The average farm would have _______________ in the short run. c. With a yield of 44 bushels of wheat per acre, the average total cost per farm was $7.71 per bushel. The harvested acreage for wheat in the United States decreased from 48.8 million acres in 2013 to 43.9 million acres in 2016. This might have happened because the price was ______________________________________ . d. Using the above information, market wheat production will ________ after 2016.

a. 2.61 b. stayed in operation c. less than the average total cost, leading some farmers to exit the market d. decrease

Your roommate is having difficulty understanding how a firm can keep operating despite losing money, earning a negative profit. How will firms respond to losing money? a. If price is below the firm's minimum average variable cost, the firm will ____________ , since it will ___________________ . b. If price is below the firm's minimum average total cost but above its minimum average variable cost, the firm will _______________ , since it will _________________ .

a. shut down; not be able to cover either its fixed costs or its variable costs b. continue operating in the short run; be able to cover its variable costs and some of its fixed costs

Bob produces flower pots for sale, which he designs and manufactures using 3-D printing technology. Bob rents a building for $30,000 per month and rents machinery for $20,000 a month. Those are his fixed costs. His variable cost per month is given in the accompanying table. Quantity of flower potsVC0$01,0005,0002,0008,0003,0009,0004,00014,0005,00020,0006,00033,0007,00049,0008,00072,0009,00099,00010,000150,000 a. The average variable cost (AVC) for a quantity of 6,000 AVC, 𝑄=6,000Q=6,000: $ ________________ b. The average total cost (ATC) for a quantity of 4,000 ATC, 𝑄=4,000Q=4,000: $ _____________ c. The marginal cost (MC) of increasing production from 8,000 to 9,000 MC: $ _______________ d. There is free entry into the industry, and anyone who enters will face the same costs as Bob. Suppose that currently, the price of a flower pot is $25. What will Bob's profit be? Profit: $ ___________________ e. Is this a long-run equilibrium? If not, what will the price of a flower pot be in the long run? Given the information in part e, this market is __________________________________________________ to lead to long-run equilibrium.

a. 5.50 b. 16.00 c. 27.00 d. 78000 e. not in a long-run equilibrium, and price will have to decrease

Bob produces flower pots for sale, which he designs and manufactures using 3-D printing technology. Bob rents a building for $30,000 per month and rents machinery for $20,000 a month. Those are his fixed costs. His variable cost per month is given in the accompanying table. Quantity of flower potsVC0$01,0005,0002,0008,0003,0009,0004,00014,0005,00020,0006,00033,0007,00049,0008,00072,0009,00099,00010,000150,000 a. Plot Bob's marginal cost curve. Graph: b. Over what range of prices will Bob produce no flower pots in the short run? c. Bob's individual supply curve is the portion of his MC curve starting at a price of

a. Graph: MC-Line (1, 5), (2, 4?), (3, 1?), (4, 5), (5, 6?), (6, 13?), (7, 16?), (8, 24?), (9, 26?), (10, 51?) b. $0 to $3.00 c. $3.00

a. The price increase is a result of an increase in demand from younger generations, mainly millennials, increasing their desire to purchase real Christmas trees. The Christmas tree farm and the overall industry will respond as follows b. The price increase is a result of fewer Christmas tree farms harvesting trees in response to consumers purchasing more artificial trees. The effect of the price increase on the Christmas tree industry will be as follows

a. In the short run, producers earn profits and increase supply. Supply is less elastic in the short run than in the long run. b. In the short run, the increase in price leads to profits for tree farms.

A new vaccine against a deadly disease has just been discovered. Presently, 55 people die from the disease each year. The new vaccine will save lives, but it is not completely safe. Some recipients of the shots will die from adverse reactions. The projected effects of the inoculation are given in the accompanying table. Percent ofpopulationinoculatedTotal deathsdue todiseaseTotal deathsdue toinoculation055010450203613028340216501510601015706208032590130100035 a. The "marginal benefit" is the ____________________ and the "marginal cost" is ____________________ in this problem. What is the marginal benefit of increasing from 40% to 50% inoculation? MB: ____________ What is the marginal cost of increasing from 70% to 80% inoculation? MC: _____________ b. The optimal percentage of the population that should be inoculated is ________ . c. The interpretation of "profit" is the _________________________ in this problem. What is the "profit" of inoculating 40% of the population? profit: ___________

a. additional lives saved due to inoculation, additional deaths due to inoculation 6 5 b. 60% c. total lives saved minus total lives lost 28

For each of the following, determine if the business is a price-taking producer and why. a. A cappuccino café in a university town where there are dozens of very similar cappuccino cafés is ______________________ product. b. The makers of Pepsi are ______________________ product. c. One of many sellers of zucchini at a local farmers' market is __________________ product.

a. considered a price taker because there are many producers and a standardized b. not considered a price taker because there is one manufacturer of Pepsi and a differentiated c. considered a price taker because there are many producers and a standardized

Evaluate each of the following statements. a. A profit-maximizing firm in a perfectly competitive industry should select the output level at which the difference between the market price and marginal cost is greatest. This statement is ___________________________________________________________________________ b. An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short run. This statement is ____________________________________________________ in the short run.

a. false. The firm should select the output where market price is equal to marginal cost. b. false. This change does not impact price nor marginal cost, thus it does not impact the profit-maximizing output

For each of the following, identify whether the industry is perfectly competitive and why. a. Aspirin ______ a perfectly competitive industry because there are __________ manufacturers, it is _________ to enter, and there is a _______________ product. b. Beyonce concerts _________ produced in a perfectly competitive industry because _____________________ . c. SUVs _______ produced in a perfectly competitive industry because there are _____ SUV producers and SUVs are ______________ .

a. is; many; easy; standardized b. are not; there is only one Beyonce c. are not; few; differentiated

The first sushi restaurant opens in town. Initially, people are very cautious about eating tiny portions of raw fish, as this is a town where large portions of grilled meat have always been popular. Soon, however, an influential health report warns consumers against grilled meat and suggests that they increase their consumption of fish, especially raw fish. The sushi restaurant becomes very popular and its profit increases. a. In the short run, we expect ____________ and, in the long run, we expect ________________________________________ in the town's sushi restaurant industry. b. Local steakhouses suffer from the popularity of sushi and start incurring losses. In the long run, we expect __________________________ in town.

a. other firms to enter because of positive profits, prices to decrease and the profit for the original sushi restaurant to decrease b. the number of steakhouses to decrease

a. A profit-maximizing business incurs an economic loss of $10,000 per year. Its fixed cost is $15,000 per year. This firm should _________________________________ if it is a profit-maximizing firm. b. Suppose instead that this business has a fixed cost of $6,000 per year. This firm should __________________________ if it is a profit-maximizing firm.

a. produce in the short run but exit in the long run b. shut down in the short run and exit in the long run

Dry CleanerCityPriceA-1 CleanersSanta Barbara$1.50Regal CleanersSanta Barbara1.95St. Paul CleanersSanta Barbara1.95Zip Kleen Dry CleanersSanta Barbara1.95Effie the TailorSanta Barbara2.00Magnolia TooGoleta2.00Master CleanersSanta Barbara2.00Santa Barbara CleanersGoleta2.00Sunny CleanersSanta Barbara2.00Casitas CleanersCarpinteria2.10Rockwell CleanersCarpinteria2.10Norvelle Bass CleanersSanta Barbara2.15Abitt's Fine CleanersSanta Barbara2.25California CleanersGoleta2.25Justo the TailorSanta Barbara2.25Pressed 4 TimeGoleta2.50King's CleanersGoleta2.50 d. Observing profits in the Goleta area, another dry-cleaning service, Diamond Cleaners, enters the market. It charges $1.95 per shirt. What is the new average price of washing and ironing a shirt in Goleta? Illustrate the effect of entry on the average Goleta price by a shift of the short-run supply curve, the demand curve, or both. The new average price of washing and ironing a shirt in Goleta is ______ . Graph: e. Assume that California Cleaners now charges the new average price and just breaks even (that is, makes zero economic profit) at this price. Show the likely effect of the entry on the accompanying cost curve diagram. Graph: f. Assuming the dry-cleaning industry is perfectly competitive, the average difference in price between Goleta and Santa Barbara implies that costs in Goleta have to be ____________ Santa Barbara.

d. 2.2 Graph: D-Line: Stay S-Line: Down Right E New Price at Intersection e. Graph: E P = 2.20 Intersection f. higher than

Given the assumptions of a perfectly competitive industry, explain why firms operating in that industry are reluctant to invest in new technological development. Firms in a perfectly competitive industry are reluctant to invest in new technological development due to _________________ . If any firm invested in new technology and earned profits, other firms will ______ the market, which will cause the price to fall and the profits to get eroded. Furthermore, due to the product being ____________ and producers being ________________ , they cannot charge a higher price and recoup their investment.

free entry and exit of firms; enter; standardized; price-takers