Intermediate Microeconomics—Chapters 8-10 (leading up to final)

If all firms in a perfectly competitive market are​ identical, which of the following is NOT a condition for​ long-run equilibrium in that​ market? A. Each firm is maximizing profits. B. No firms want to enter or exit the industry. C. Price is above average cost for all firms. D. All firms are earning zero economic profits.

C. Price is above average cost for all firms.

1) What is the long run output of a profit maximizing competitive firm? 2) How do you calculate accounting profit? 3) How do you calculate the economic profit?

Long run output of profit maximizing competitive firm = *point where P = MC* --> Higher the price = higher the profit 2) Accounting profit = R - wL (positive) --> Revenue - labor costs 3) Economic profit = R - wL - rK --> Revenue - labor costs - capital costs

Suppose demand increases the price for oil from $160 to $200. Original LRAC local minimum = $160 What happens to the new LRAC, in response to this price change?

New LRAC would just be a shift upwards by the exact price change = *new LRAC shifts upwards by $40!* New local minimum = $200!

Suppose PES of liquor = 4; PED of liquor = -0.3; and cross PED = 0.1. 1) If a new tax is imposed, who will bear the greater burden—liquor suppliers, or consumers? 2) What % of tax do consumers/producers shoulder? 3) Assuming that beer supply is infinitely​ elastic, how will the new tax affect the beer​ market? A. The demand for beer will​ decrease, and the price of beer will decrease. B. The demand for beer will​ increase, and the price of beer will increase. C. The demand for beer will​ decrease, but the price of beer will not change. D. The demand for beer will​ increase, but the price of beer will not change.

Tax: Inelastic = more burden; elastic = less burden 1) Consumers bear the greater burden--> less elastic! 2) Es/Es-Ed = % of tax shouldered by consumers --> 4/[4-(-0.3)]--> 0.93 *Consumers shoulder 93% of tax; producers shoulder 7% of tax* 3) D. The demand for beer will​ increase, but the price of beer will not change. --> Since demand = inelastic, demand will not change--> price won't change

Where should unemployment be shown on the graph, when described as double arrowed line?

Unemployment as double arrowed line should be at price point! --> On the line of the minimum wage amount itself

How do you calculate world price with tariff? How do you calculate welfare effects for tariff? How do you maximize welfare effect?

World price with tariff = original equilibrium world price + tariff, lol Welfare effects for tariff = change in CS + change in PS + tariff revenue for gov't --> Tariff revenue for govt = tariff $ x amount of imports --> Maximize PS and CS

Suppose world price > domestic equilibrium price. Domestic: 1) What is the consumer surplus at equilibrium? 2) What is the producer surplus at equilibrium? 3) What is the consumer surplus after trade? 4) What is the producer surplus after trade? 5) What are the welfare effects? World: 6) What is the consumer surplus at equilibrium? 7) What is the producer surplus at equilibrium? 8) What is the consumer surplus after trade? 9) What is the producer surplus after trade? 10) What are the welfare effects? 11) Who wins and loses?

*Domestic: world price > world equilibrium price (exports)* 1) Consumer surplus @ equilibrium = J + K + I 2) Producer surplus @ equilibrium = L + M + Y 3) Consumer surplus @ trade (losers) = J 4) Producer surplus @ trade (winners) = L + M + Y + K + I + reservoir/gap at higher price between S and D 5) Welfare effects = change in CS + change in PS --> Change in CS = new CS - old CS = (J) - (J + K + I)= -K - I --> Change in PS = new PS - old PS = (L + M + Y + K + I + triangle at higher price between S and D) - (L + M + Y) = K + I + triangle at higher price between S and D --> Welfare effects = [-K - I] + [K + I + triangle at higher price between S and D] --> *Welfare effects with free trade = triangle at higher price between S and D above equilibrium* = domestic gain from trade *World: world trade price < world equilibrium price (imports)* 6) Consumer surplus @ equilibrium = J + K + I 7) Producer surplus @ equilibrium = L + M + Y 8) Consumer surplus @ trade (winners) = J + K + I + L + Y + triangle at lower price between S and D 9) Producer surplus @ trade (losers) = M 10) Welfare effects = change in CS + change in PS --> Change in CS = new CS - old CS = (J + K + I + L + Y + triangle at lower price between S and D) - (J + K + I) = L + Y + triangle at lower price between S and D --> Change in PS = new PS - old PS = (M) - (L + M + Y) = -L - Y --> Welfare effects = [L + Y + triangle at lower price between S and D] - [-L - Y] = triangle at lower price between S and D --> *Welfare effects with free trade = triangle at lower price between S and D under equilibrium* = world gain from trade 11) Winners: -World consumers -Domestic producers Losers: -World producers -Domestic consumers

1) How does the firm know whether or not it should produce more/less, just looking at marginal values? 2) On a graph, where would the firm want to produce, to maximize profit? 3) What are the axes for R/C graph? 4) How do you derive profit graph from Revenues/Costs graph? 5) What are the axes for MR/MC, and ATC graph? 6) Suppose you are analyzing a perfectly competitive firm. P = 10 (where P = MC); ATC = 8; profit maximizing quantity = 30. What is the profit? 7) Suppose AVC = 5. What is the variable profit? 8) How do you determine the price at which the firm will earn positive economic profit in the short run? 9) How do you know when firm should shut down in the short run, and long run?

1) i. Marginal revenue > marginal cost = produce MORE ii. Marginal revenue < marginal cost = produce LESS iii. Marginal revenue = marginal cost = already at optimal production; stay the SAME --> MR and MC = slopes of the Revenue and Cost lines = where Revenue and Cost lines have same slope 2) Where Revenue and Cost lines are parallel/have the same slope--> where MR = MC --> Biggest gap between Revenue and Cost (more profit) 3) R/C graph: x = quantity output; y = $ 4) Profit graph = upside down U, with peak = (profit maximizing q, maximum profit) 5) MR/MC and ATC graph: x = quantity output; y = $ per unit output 6) Profit = area of difference between P and ATC x quantity-->(p - ATC) x q-->(10-8) x (30) = 60 7) Variable profit = area of difference between price and AVC x quantity--> (p - AVC) x q--> ( 10-5) x (30) = 150 8) Any price > intersection between ATC and MC! 9) Short run: i. When P > AVC, variable profit = positive--> should NOT shut down in the short run ii. When P < AVC, variable profit = negative--> should shut down in the short run --> Depends on price expectations of the future (if price goes up, keep open, vice versa) Long run: i. When P > ATC, profit = positive--> should NOT shut down in the long run ii. When P < ATC, profit = negative--> should shut down in the long run

1) What are the 3 conditions of long run competitive equilibrium? 2) What is the normal return on investment for competitive firm?

1) *3 conditions of long run competitive equilibrium:* i. All firms in the industry = maximizing profit ii. No firm has incentive to enter/exit the industry (all firms = zero economic profit) iii. Price of product is at the intersection of Qd = Qs 2) Normal return on investment for competitive firm = 0 economic profit --> Firm is doing as well now as it would have with an investment at another place/earning a competitive return

Suppose a price ceiling is imposed on housing market. Describe the following graphically: 1) Consumer surplus before price ceiling 2) Consumer surplus with price ceiling 3) Consumer's deadweight loss i. What is this a result of? ii. How do you reduce consumer's deadweight loss? 4) Change in CS as result of price ceiling i. What do the variables in the equation represent? 5) Producer's surplus with no price ceiling 6) Producer's surplus with price ceiling 7) Producer's deadweight loss i. What is this a result of? ii. How do you reduce producer's deadweight loss? 8) Change in PS as result of price ceiling i. What do the variables in the equation represent? 9) Total welfare effects i. What do the variables in the equation represent? 10) Total deadweight loss 11) Who are the losers and winners of this price ceiling in the short run? Long run? 12) Describe how to tell when the following players win/lose: i. Consumers ii. Producers

1) *CS with no price ceiling* = J + K + I 2) *CS with price ceiling* = J + K + L 3) *Consumer's deadweight loss* = I--> loss from lower Qs i. Consumers not buying as much as they would like, as result of price ceiling ii. Can reduce consumer's deadweight loss by making demand slope = flatter (more elastic) --> Lots of good substitutes 4) *Change in CS as result of price ceiling* = J + K + L - J - K - I = *L - I* i. L = gain from lower price = people who already have apartment -I = loss from lower quantity = people who can't find apartment 5) *PS with no price ceiling* = M + L + Y 6) *PS with price ceiling* = M 7) *Producer's deadweight loss* = Y--> loss from lower Qs i. Producers not supplying/profiting as much as they would like, as result of price ceiling ii. Can reduce producer's deadweight loss by making demand slope = steeper (inelastic) --> Same amount Qs no matter the price! 8) *Change in PS as result of price ceiling* = PS with price ceiling - PS with no price ceiling = M - L - Y - M = *-L - Y* --> -L = loss from lower price --> -Y = loss from lower quantity supplied 9) *Total welfare effects* = change in CS + change in PS --> Welfare effects = L - I - L - Y = *-I - Y* i. L = transfer of profit/gain from producers to consumers 10) *Total deadweight loss* = I + Y --> Loss to society 11) --> *Short run*: -Producers lose -Society loses- benefit to consumers not enough to offset loss to producers -Consumers benefit- change in consumer surplus > 0! --> *Long run*: -Producers lose -Society loses -Consumers lose- Qs of apartments too low to help consumers! 12) Consumers win = change in consumer surplus (L - I) > 0 Consumers lose = change in consumer surplus (L - I) < 0

What are the 3 types of cost industry? How would you categorize coffee, oil, and automobiles in these cost industries?

1) *Constant cost industry*- industry where long run supply curve = horizontal --> ie- coffee 2) *Increasing cost industry*- industry whose long run supply curve = upward sloping --> Diseconomies of scale is one potential explanation (cost more than doubles when output doubles) --> ie- oil 3) *Decreasing cost industry*- industry whose long run supply curve = downward sloping* --> Not necessarily economies of scale that causes this --> ie- automobiles

Define the following: 1) Cooperative 2) Condominium

1) *Cooperative*- association of businesses/people, owned jointly, operated by members for mutual benefit --> Objective = high quality products at lowest possible costs --> ie- farmer's coop; housing coop 2) *Condominium*- overall housing unit = individually owned; hallways/heating system/elevators/exterior areas = jointly controlled by association of condo owners --> Simplifies governance, unlike cooperatives

1) What is economic efficiency? What does it imply for surplus and deadweight loss? 2) What is a market failure? 3) Define the two factors that lead to market failure.

1) *Economic efficiency*- every resource is optimally allocated to serve each person/entity in best way possible -Minimal waste/inefficiency -Any changes made to assist one entity = harms another; zero sum game -Total surplus = maximized -Deadweight loss = 0 2) *Market failure*- allocation of goods by free market = not efficient (what's new) -Competitive market = inefficient bc prices fail to provide proper signals to consumers/producers - ie- there exists a scenario in which someone can be better off withOUT someone being made made worse off 3) *Two factors of market failure*: i. Externalities- non monetary costs/benefits of consumers/producers --> Positive- vaccination (you protect yourself AND others), research for creating new products educates society (knowledge spillover), etc. --> Negative- pollution, bank failure, poverty, monopolization of resources, crime (to opening of new liquor store), etc. etc. etc. etc. etc. etc. etc. etc. etc.

1) What is an import quota? (list its goals) 2) What is a tariff? (list its goals) 3) How do you calculate exports? 4) How do you calculate imports? 5) What is trade equilibrium between world and domestic?

1) *Import quota*- limit on number of imports into country --> Less cheap goods from other countries coming in--> limits competition to domestic producers--> domestic producers don't have to lower price--> prices are high = more profit = consumers suffer (WHATS NEW, profit is put > people) 2) *Tariff*- taxes on imported goods --> Higher taxes on imported goods--> foreign producers less willing to sell goods to country--> limits competition to domestic producers--> prices remain high = more profit = consumers suffer! (WHATS NEW, profit is put > people) 3) x = quantity of US; y = price Higher foreign price = causes US suppliers to raise price above equilibrium --> Price above equilibrium = US demand decreases--> surplus = exports --> *Exports = domestic Qs - domestic Qd* --> Suppliers export when world price > domestic price 4) *Imports = domestic Qd - domestic Qs* --> Consumers order imports when world price < domestic price Consumers' loss > domestic producers' gain 5) Domestic price = world price--> exports = imports--> trade equilibrium

1) What does the demand curve facing an individual competitive firm look like? 2) What does the demand curve facing the industry which contains the individual competitive firm look like? 3) What does a competitive firm's short run supply curve look like? 4) Would a firm produce more or less for a market price < marginal cost of production?

1) *Individual competitive firm*- Horizontal line; it is perfectly elastic (demand = infinite at one price) (Remember that vertical line = perfectly inelastic; horizontal line = perfectly elastic) 2) *Industry containing individual competitive firm*- typical downward sloping demand curve 3) *Competitive firm's SR supply curve*- portion of the MC curve where MC > AVC; upward sloping --> Higher the price = more the output (law of supply!) 4) P < MC = firm produces less; costs > potential profit! --> capitalism

Chapter 8 HW: 1) q: 0;1;2;3;4;5;6;7;8;9;10;11 P: 60 TC: 100;150;178;198;212;230;250;272;310;355;410;475 a) Find Revenue, Profit, Marginal Cost, and Marginal Revenue for P = 60 b) Find Revenue, Profit, and Marginal Revenue for P = 50 --> Show what happens to the firm's output choice and profit if the price of the product falls from $60 to $50. 2) What happens to competitive firm's output choice/Profit if fixed cost increases from $100 to $150? What happens if fixed costs increases from $150 to $200? Assume that P = 60. What general conclusion can you reach about the effects of fixed costs on the firm's output choice? 3) a) Derive the firm's short run supply curve, using original table from (1). (Hint: you may want to plot the appropriate cost curves.) b) If 100 identical firms are in the market, what is the industry supply curve?

1) *P = 60* R: 0;60;120;180;240;300;360;420;480;540;600;660 Profit: -100;-90;-58;-18;28;70;110;148;170;185;190;185 MC: —;50;28;20;14;18;20;22;38;45;55;65 MR: —;60---> *P = 50* R: 0;50;100;150;200;250;300;350;400;450;500;550 Profit: -100;-100;-78;-48;-12;20;50;78;90;95;90;75 MR: —;50---> 2) FC = 100--> q = 10; profit = 190 FC = 150--> q = 10; profit = 140 FC = 200--> q = 10; profit = 90 In all of the given cases, with fixed cost equal to 100, then 150, and then 200, the firm will produce 10 units of output because this is the point closest to where price equals marginal cost without having marginal cost exceed price. --> Fixed costs do not influence the optimal quantity, because they do not influence marginal cost. --> Higher fixed costs also result in lower profits. 3) a) Short run = need to find AVC --> AVC > MC = 0 quantity output q: 0;1;2;3;4;5;6;7;8;9;10;11 MC: —;50;28;20;14;18;20;22;38;45;55;65 AVC: —;50;39;32.7;28;26;25;24.6;26.3;28.3;31;34.1 --> Firm will produce for anything equal/above q = 8 (bc AVC > MC for q = 0-7) --> Just plot upwards sloping line with starting point P = 60; q = 8 b) 100 identical firms = multiple quantity by 100; P remains the same! --> Just plot upwards sloping line with starting point P = 60; q = 800

1) What is a price support? a) How does it affect consumers, producers, and gov't? 2) What is a production quota? a) How does it affect consumers, producers, and gov't? 3) What are both of these methods' goals?

1) *Price support*- price above equilibrium set by gov't; higher price = maintained by gov't purchase of excess supply/surplus (price floor = surplus) a) -Consumers- :(( demand falls -Producers- :) supply rises -Gov't- :( additional cost (which is paid through taxes = ultimately cost to consumers) --> Cost could be reduced if gov't dumped its purchases/sold them for cheap abroad--> hurts domestic producers in foreign markets--> contradicts purpose of price support 2) *Production quota*- gov't ensures price above equilibrium through reducing supply/quota on supply--> firms can only make so much; raise prices to profit more a) -Consumers- :(( demand falls -Producers- :) supply falls, forced to raise prices, surplus -Gov't- :( no additional cost 3) Both goals = raise prices above equilibrium

How do you determine/calculate the following? 1) Profit 2) Marginal revenue 3) Profit maximization 4) Profit maximization for competitive firm 5) Profit maximizing level of output for competitive firm 6) Marginal cost

1) *Profit (π)* = R(q) - C(q) <-- this just means that R and C depend on output = (Price x quantity sold) - Costs = Total revenue - total costs 2) *Marginal revenue* = change in revenue/change in output --> Change in revenue as a result of output increasing by 1 unit 3) *Maximum profit* = when MR = MC --> change in revenue/change in output = change in total cost/change in output --> When MR-MC = 0 4) *Profit maximization for competitive firm* = when MC(q) = MR = P --> change in revenue/change in output = change in total cost/change in output = price --> Rule for setting output, since price is fixed for competitive firms! 5) *Profit maximizing level of output for competitive firm* = when q (output level) = MR = MC 6) *Marginal cost*- typically a function is given, but also = w/MPl --> If w increases = supply decreases/shifts left

1) What are the 4 types of market failures? 2) Define the following: i. Monopoly ii. Monopsony iii. Oligopoly iv. Natural monopoly v. Market power vi. Antitrust laws vii. Barriers to entry

1) 4 types of market failures: i. *Market power*- company has too much market power, can control price --> ie- Time Warner, Pearson, Duke Energy --> ie- monopoly; monopsony (1 buyer = only 1 employer in region/1 buyer of labor); oligopoly (apple vs. samsung) ii. *Public goods*- everyone benefits but people get free ride without paying person who built good iii. *Externalities*- not in market/external sh*t --> Negative = pollution, iv. *Asymmetric Information*- not enough info for consumers 2) i. Monopoly- 1 seller but many buyers ie- Time Warner cable, etc. ii. Monopsony- 1 buyer but many selers ie- happens in labor market a lot; only 1 buyer of labor/employer, many employees in region = people stuck in jobs that don't pay enough iii. Oligopoly- very limited competition, market controlled by small # sellers ie- Samsung vs. Apple, etc. iv. Natural monopoly v. Market power- ability of buyer/seller to control price vi. Antitrust laws- vii. Barriers to entry

How do you calculate [short run] producer surplus... 1) Graphically? 2) Mathematically?

1) Area above [producer's] supply curve/below market price [of good] 2) Producer surplus = market price [of good] - marginal cost [of production] = *P - MC* OR revenue - total variable cost (otw known as variable cost) = *R - VC*

1) Does a subsidy create a deadweight​ loss? Why or why​ not? A. Yes. While producers and consumers gain​ surplus, the cost of the subsidy exceeds their gain. The cost of the subsidy is the subsidized equilibrium​ quantity, which is lower than the​ free-market quantity, multiplied by the subsidy per unit. B. No. Consumers and producers gain​ surplus, while the cost of the subsidy is minimal. In​ fact, a subsidy often results in a net gain in welfare. C. Yes. While producers and consumers gain​ surplus, the cost of the subsidy exceeds their gain. The cost of the subsidy is the subsidized equilibrium​ quantity, which is higher than the​ free-market quantity, multiplied by the subsidy per unit. D. No. Although the cost of a subsidy is typically​ large, there is no deadweight loss because it only occurs in the case of underproduction. A subsidy increases the equilibrium quantity relative to the​ free-market quantity. 2) A tariff can be described as​ ________________. The purpose of a tariff is to protect​ _____________. A. a tax on an imported​ good; domestic consumers from foreign competition by lowering the domestic price of the good. B. either a tax on or a limit on the quantity of an imported​ good; domestic consumers from foreign competition by lowering the domestic price of the good. C. either a tax on or a limit on the quantity of an imported​ good; domestic producers from foreign competition by raising the domestic price of the good. D. a tax on an imported​ good; domestic producers from foreign competition by raising the domestic price of the good.

1) C. Yes. While producers and consumers gain​ surplus, the cost of the subsidy exceeds their gain. The cost of the subsidy is the subsidized equilibrium​ quantity, which is higher than the​ free-market quantity, multiplied by the subsidy per unit. 2) D. a tax on an imported​ good; domestic producers from foreign competition by raising the domestic price of the good.

Suppose equilibrium price = 0.50; equilibrium quantity = 100 Gov't decides to do price support--> raise price to $1. --> At $1, Qs = 125 --> At $1, Qd = 75 1) How much does the price support cost the gov't? 2) Which of the following would increase the cost of the​ program? A. The demand curve becomes relatively more elastic. B. The supply curve becomes relatively more elastic. C. The supply curve becomes relatively more inelastic. D. Both A and C. E. Both A and B. 3) How would you graph demand or supply curve to = greatest loss to consumer surplus?

1) Cost of price support = price support x excess supply = price support x (Qs-Qd) --> $1 x (125-75) = *50* 2) E. Both A and B. --> More elastic = consumers and suppliers bear less of the price support costs--> gov't has to bear more! 3) Demand curve = completely inelastic (vertical) OR Supply curve = completely elastic (horizontal)

1) A good example of an industry that is nearly perfectly competitive is the market for A. ice cream. B. shoes. C. pharmaceutical drugs. D. apples. E. utilities. 2) If all firms in a perfectly competitive market are​ identical, which of the following is NOT a condition for​ long-run equilibrium in that​ market? A. Each firm is maximizing profits. B. No firms want to enter or exit the industry. C. Price is above average cost for all firms. D. All firms are earning zero economic profits.

1) D. apples. 2) C. Price is above average cost for all firms. (if perfectly competitive, profit = 0 = where P = MC = ATC in long run)

1) *Can there be constant returns to scale in an industry with an​ upward-sloping supply​ curve? Explain.* Constant returns to scale with an​ upward-sloping long-run industry supply curve... A. are possible because proportional increases in inputs yielding the same proportional increase in output may induce lower input prices. B. are not possible because proportional increases in inputs will only yield the same proportional increase in output if input prices remain constant. C. are not possible because proportional increases in inputs yielding the same proportional increase in output will induce lower input prices. D. are possible because proportional increases in inputs yielding the same proportional increase in output may induce higher input prices. E. are possible because proportional increases in inputs yielding greater than proportional increases in output may induce higher input prices. 2) In an increasing minus cost ​industry, the​ long-run industry supply curve is... A. vertical B. downward sloping C. horizontal D. upward sloping

1) D. are possible because proportional increases in inputs yielding the same proportional increase in output may induce higher input prices. --> Referring to supply curve with y = cost; x = q output supplied --> So input prices could increase = upward sloping 2) D. upward sloping --> Referring to supply curve with y = cost; x = q output supplied

1) For a market to be perfectly​ competitive, A. firms must have market​ power, firms must produce a differentiated​ product, and firms must be able to easily enter and exit the market. B. only one firm can produce​ output, no close substitutes may​ exist, and firms must not be able to enter the market. C. only a few firms may produce​ output, firms must have market​ power, and firms must produce a homogenous product. D. firms must be price​ takers, firms must produce a homogeneous​ product, and firms must be able to easily enter and exit the market. E. only one firm can have access to a key​ input, the government must regulate entry of new​ firms, and the​ long-run average cost of production must be decreasing. 2) If firms are price​ takers, then A. they will produce where price equals average variable cost. B. they will earn zero economic profit. C. they will have market power. D. they will produce where marginal revenue is less than marginal cost. E. they will produce where price equals marginal cost. 3) If firms produce a homogeneous​ product, then A. consumers will be willing to pay different prices for output from different firms. B. individual firms can raise price without losing all sales. C. products will be perfectly substitutable with one another. D. the market may have multiple prices. E. market output will not be a commodity. 4) If firms can easily enter and exit a​ market, then A. firms will produce at minimum average cost in the short run. B. firms will earn zero economic profit in the long run. C. firms will produce where price is less than marginal cost. D. firms will produce where price is greater than marginal revenue. E. firms will produce at minimum average fixed cost in the long run.

1) D. firms must be price​ takers, firms must produce a homogeneous​ product, and firms must be able to easily enter and exit the market. 2) E. they will produce where price equals marginal cost. NOT B. they will earn zero economic profit. --> Firms can earn positive OR negative economic profit in the short run 3) D. the market may have multiple prices. 4) B. firms will earn zero economic profit in the long run. --> No special costs for entry/exit, so 0 economic profit = best return of investment they can get!

Domestic: Qs = 0.5P; Qd = 38-2P World price = 9, where Q available for import into US = unlimited Suppose US reduces tariff from $10 to 0. 1) Under $10 tariff, what was US domestic price of metal? 2) If US eliminates tariff and voluntary restraint agreement is approved, what will US domestic price of metal be? Suppose US industry is seeking voluntary restraint agreement that would limit imports into US to 6 million units.

1) Domestic price of metal = equilibrium P --> Set Qs = Qd 0.5P = 38-2P--> *P = 15.2, since corporations take advantage of tariff to raise prices with little to no competition, yay exploitation* 2) Limit of imports = 6 --> Qd-Qs = 6 (38-2P)-0.5P = 6--> *P = 12.8 without tariff, but with voluntary restraint agreement*

Market demand: Qd = 12800 - 100P Market supply: Qs = 1500P Total cost: C = 774 + (q^2)/200 Marginal cost: MC = 2q/200 Assume that all firms are identical and that the market is characterized by perfect competition. 1) Find the equilibrium price and quantity 2) Find the output supplied by one firm 3) Find the profit of each firm. 4) Would you expect to see entry into or exit from the industry in the long run? Explain 5) What effect will entry or exit have on market equilibrium? 6) What is the lowest price at which each firm would sell its output in the long run? Is profit positive/negative/zero at this price? 7) Why would a firm not be willing to produce in the long run at prices below the minimum? 8) What is the lowest price at which each firm would sell its output in the short run? Is profit positive/negative/zero at this price? 9) Why would a firm not be willing to produce in the short run at prices below the minimum?

1) Equilibrium = set Qd to Qs P0: 12800 - 100P = 1500P--> 12800 = 1600P--> *P = 8* Q0: 12800 - 100(8)--> *Q0 = 12000* 2) Output supplied by firm has to be profit maximizing, unless stated otherwise--> set P = MC --> 8 = 2q/200--> 1600 = 2q--> *q = 800 units* 3) Profit of each firm = Revenues - Costs --> (800 x 8) - (774 + (800^2)/200))--> *Profit = 2426* 4) DON'T SECOND GUESS YOURSELF! Would expect to see ENTRY--> since Profit > 0 --> If Profit = 0, no entry or exit --> If profit < 0, exit 5) More firms entering = lower price More firms entering = more quantity supplied (Firms exiting = higher price, less Qs) 6) <TRUST YOURSELF, YOUR FIRST INSTINCT WAS RIGHT> Long run supply--> P = MC (where profit = 0), as long as P > ATC --> Set MC = ATC to find minimum price! --> 2q/200 = 774/q + q/200--> q = 393.45 --> Plug into MC or ATC to find price --> 2(393.45)/200--> *P = 3.93* 7) Firm would NOT want to produce in long run at P < 3.93 bc: --> Profit = negative --> Firm would be better off exiting the industry since there are NO fixed production costs in the long run (no fixed costs keeping them in the market) 8) Short run--> P = MC(profit = 0), as long as P > AVC --> Set MC = AVC to find minimum q; plug into MC or AVC to find minimum price! --> 2q/200 = q/200--> q = 0 --> *Minimum P = 0* Recall any P < $3.93 = negative profit; so profit = negative! 9) Firm would be willing to produce in short run at P > 0 bc: --> Firm would incur larger losses for shutting down than producing (losses = FC)

Suppose Qd = 200 - 4P; Qs = 20 + 2P A tax of $5 is imposed on every unit of the good. 1) What's the equilibrium price and quantity without a tax? 2) What's the new equilibrium prices and quantity with the tax? 3) Who bears most of the burden? How much? 4) What's the tax revenue and DWL? 5) What are the welfare effects? 6) What are changes in producer/consumer surplus? 7) How would you solve the same equation for subsidy? (equation + 4 conditions)

1) Equilibrium w/o tax--> when Qd = Qs --> 200 - 4P = 20 + 2P--> P0 = 30; Q0 = 80 2) Equilibrium P and Qw/ tax--> i. Plug tax value into Pc = Pp + t --> Pc = Pp + 5 ii. Plug Pc equation/value into P for Qd; set Qs in terms of Pp and set Qd = Qs --> 200 - 4(Pp + 5) = 20 + 2Pp--> *new equilibrium Pp = 26.66* iii. Plug Pp value into tax equation to find Pc equilibrium value! --> Pc = 26.66 + 5--> *new equilibrium Pc = 31.66* iv. Plug either Pc or Pp into Qd or Qs equation to derive Q (remember that Q should be the same for demand and supply!) --> Qd = 200 - 4(31.66)--> 73.72 --> Qs = 20 + 2(26.66)--> 73.32 --> *new equilibrium Q = 73.32* 3) % of tax shouldered by consumer = Es/(Es - Ed) --> Easier way to do this is to find (consumer or producer price change/tax) to determine who bears most burden! --> Consumer price burden = (difference between Pc and P0)/tax--> (31.66-30)/5 = 0.332 --> Producer price burden = (difference between Pc and P0)/tax--> (30-26.66)/5 = 0.668 *Producers bear the most burden of the tax (66.8% of the burden, to be exact)* 4) i. Tax revenue = (difference between Pc and Pp) x (Q at Pc and Pp, which should be the same Q) --> (31.66-26.66) x (73.32) = *$366.60 tax revenue* ii. DWL = little triangle from new Q at tax to equilibrium = 1/2(difference between Q0 and Q at tax) x (difference between Pc and Pp) --> 1/2(80-73.32) x (31.66-26.66) = *$16.7 in DWL* 5) Welfare effects = change in CS + change in PS --> What producers and consumers lose = tax revenue + DWL--> 366.6 + 16.7 = *welfare effects = -$383.3* 6) i. Change in CS = what consumer loses, in case of tax = upper half of tax revenue + upper half of DWL! = (% consumers bear)(tax revenue + DWL) expressed as a loss --> 0.332(366.6+16.7) = 127.26--> *change in CS = -$126.26* ii. Change in PS = lower half of tax revenue + lower half of DWL = (% producers bear)(tax revenue + DWL) expressed as a loss --> 0.668(366.6+16.7) = 256--> *change in PS = -$256* *% borne by consumer/producer multiplication method only works for linear supply/demand!* 7) Subsidy = subsidy in cents; *use Pp = Pc + S* --> Tax--> Pc = Pp + t --> Subsidy--> Pp = Pc + S --> Both producers/consumers gain; society/gov't spends = subsidy revenue spent by gov't --> 4 conditions: i. Pc, Qd = on demand curve ii. Pp, Qs = on supply curve iii. Qs = Qd iv. Pp = Pc + S

Demand for wind turbines: P = 23-0.2Q Supply for wind turbines: P = 5+0.8Q Market = perfectly competitive 1) What are equilibrium quantity and price? 2) Gov't offers suppliers subsidy = $2/unit output. What is the new equilibrium price? 3) What is the amount sellers receive for each unit of output? 4) What is the amount buyers are paying for each unit of output? 5) What is the DWL caused by subsidy?

1) Equilibrium--> 23-0.2Q = 5+0.8Q --> *Q0 = 18; P0 = 19.4* 2) Subsidy = P-2 for supply equation--> subsidy = gov't takes on $2 from suppliers Supply--> P = 5+0.8Q-2 Demand--> 23-0.2Q 23-0.2Q = 5+0.8Q-2 --> *New Q0 = 20; P0 = 19* 3) Amount that sellers receive for each output = new P0 + $2 subsidy--> *$21 received by sellers* (since Pp = Pc + S) 4) Amount buyers pay = equilibrium price--> *$19 paid by buyers* 4) Subsidy DWL = 1/2(equilibrium Q w/o subsidy-Qd at Pc)(difference between Pc and Pp) Width: --> Equilibrium Q w/o subsidy = 18 --> Qd at Pc--> (19) = 23-0.2Q--> Q = 20 Width = 20-18 = *2* Height: --> Pp = 21 --> Pc = 19 Height = 21-19 = *2* DWL = 0.5(2)(2) = *2 DWL*

Suppose firm's production function is: q = 4(x^0.5) In the short run, there are fixed costs of $1000, and x is the variable input whose cost is $400 per unit. 1) What is the total cost of producing a level of output q? 2) What is the equation for the supply curve? 3) If price is $800, how many units will the firm produce? 4) What is the level of profit?

1) Just asking for total cost function--> TC = FC + VC FC = 1000 VC = 400x --> Find x in terms of q (isolate x)--> q/4 = x^0.5--> (q/4)^2 = x--> x = q^2/16 *TC = 1000 + 400(q^2)/16* 2) Firm maximizes profit by supplying where P = MC --> MC = derivative of TC = 800q/16--> MC = 50q --> *Supply curve is P = 50q* 3) Plug into P = MC--> 800 = 50q--> *q = 16* 4) Profit = Revenues - Costs --> (16 x 800) - (1000 + (400(16^2))/16) = *$5400*

q: 0;1;2;3;4;5;6;7;8;9;10;11 C: 100;150;178;198;212;230;250;272;310;355;410;475 MC: —;50;28;20;14;18;20;22;38;45;55;65 1) What is marginal revenue when P = $60? 2) What is marginal revenue when P = $42? 3) What happens to the firm's output choice if P falls from $60 to $42? 4) What happens to the firm's profit if P falls from $60 to $42?

1) MR = change in total revenue/change in output --> Change in total revenue = (60 x 1)-(60 x 0) = 60 --> Change in output = 1 - 0 = 1 --> *MR = 60* 2) MR = change in total revenue/change in output --> Change in total revenue = (42 x 1)-(42 x 0) = 42 --> Change in output = 1 - 0 = 1 --> *MR = 42* 3) Firm produces at output to maximize profit--> when P = MC, or with closest MC < P --> P = $60; MC that's closest = 55--> q = 10 --> P = $42; MC that's closest = 38--> q = 8 *Firm's output decreases from 10 to 8* 4) Profit = R - TC --> P = 60--> (60 x 10) - 410 = 190 --> P = 42--> (42 x 8) - 310 = 26 *Firm's profit decreases from $190 to $26*

Suppose there are 2 firms. Firm A has supply of S = 3P - 3 Firm B has supply of S = 5P - 10 1) What is the market supply curve? (Don't forget the kink(s)!) 2) Graph Firm A, Firm B, and market supply.

1) Market supply = sum of firms in market (3P - 3) + (5P - 10)--> *Sm = 8P - 13* --> Sa = 3P - 3, when P > 1 --> Sb = 5P - 10, when P > 2 2) Firm A = 3P - 3--> for P > 1 --> Supply curve starts from Q = 0; P = 1 and goes upward Firm B = 5P - 10--> for P > 2 --> Supply curve starts from Q = 0; P = 2 and goes upward Market curves: 3P - 3--> for 1 < P < 2 8P - 13--> for P > 2

There are 100 firms in a perfectly competitive industry. Each firm has the​ short run supply curve q​ = P - 2 for P​ > 2, and q​ = 0 for P less than or equal to 2. 1) What is the market supply curve for this industry? 2) How much will the firms in the industry supply if the market price is $5? 3) What is the total producer surplus?

1) Market supply = summation of all supply curves within industry 100 (P - 2) = *100P - 200 for P > 2; q = 0 for P less than or equal to 2* 2) If P = 5--> 100(5) - 200 = *300 units of output supplied* 3) Producer surplus = market price - marginal cost, OR area under price, above supply curve --> Base = 300 --> Height = 5-2 = 3 --> Area = 0.5(3 x 300) = *$450 producer surplus*

Suppose the following are true for a watchmaking firm operating in a competitive market: Cost of production = 200 + 2(q^2) MC(q) = 4q FC = 200 P = 120 1) How many watches should firm produce to maximize profits? 2) What will the profit level be? 3) At what minimum price will the firm produce a positive output?

1) Maximum profit = when MC = P --> 120 = 4q--> q = *30 watches* 2) Profit = Revenues - Costs --> (120 x 30) - (200 + 2(30^2)) = *$1600, which is the maximum profit* 3) Firm will produce positive output in short run if Revenues > VC--> if Price > Average Variable Cost--> *if MC > AVC (since P = MC for competitive firm)* --> Variable cost = (200 + 2(q^2)) - 200 = 2(q^2) --> Average variable cost = (2(q^2))/q = *2q* --> MC = 4q --> 4q > 2q, as long as q > 0--> *As long as P is positive, firm will produce positive output*

Where is the supply curve... 1) More elastic? 2) More inelastic?

1) More elastic = at lower prices --> So small increase in price = large increase in Qs --> More elastic bc producers want to produce more at higher prices, but prices are not so high as to trigger capacity constraints 2) More inelastic = at higher prices --> More inelastic bc producers operating close to capacity at those prices

P'' = equilibrium; government imposes price ceiling of P'''. 1) Change in CS due to price ceiling = ? 2) Change in PS due to price ceiling = ? 3) DWL due to price ceiling = ?

1) Old CS = J+K+I New CS = J+K+L Change in CS = new CS - old CS = (J+K+L)-(J+K+I) = *L-I* --> Intuitively, consumers gain L, while losing I = L-I 2) Old PS = M+L+Y New PS = M Change in PS = new PS - old PS = (M)-(M+L+Y) = -L-Y --> Intuitively, producers lose L and Y = -L-Y 3) DWL = I+Y

Number of stores offer film developing as service to their customers in competitive industry: C(q) = 50 + 0.20q + 0.0800(q^2) MC(q) = 0.20 + 0.160q 1) If going rate for developing roll of film is $6.25, is the industry in long run equilibrium? 2) What is the price associated with long run equilibrium? 3) Suppose now a new technology is developed that will reduce the cost of film developing by 25%. Assuming the industry is in long run equilibrium, how much would any one store be willing to pay to purchase this new technology?

1) P = 6.25; long run equilibrium = when Profit = 0 --> Profit = Revenues - Costs i. Find profit maximizing q output--> P = MC --> 6.25 = 0.20 + 0.160q--> q = 37.81 ii. Revenues = 6.25 x 37.81 = 236.33 iii. Costs = 50 + 0.20(37.81) + 0.08(37.81^2) = 171.93 iv. Profit = 236.33 - 171.93 = 64.4 profit, which does NOT = 0 --> *No, industry is NOT in long run equilibrium* 2) Long run equilibrium for competitive firm--> produce where P = MC, and at minimum of MC = ATC--> which results in Profit = 0 --> ATC = 50/q + 0.2 + 0.08q i. Set equal to MC! --> 0.20 + 0.160q = 50/q + 0.2 + 0.08q --> q = 25 ii. Now plug q into either function to find $ value for price! --> 0.20 + 0.160(25)--> *P = 4.2* 3) Amount any one store would be willing to pay = potential profit made from the new tech! Reduced by 25% = 75% of original cost --> (0.75)MC = 0.15 + 0.12q --> (0.75)TC = 37.5 + 0.15q + 0.06(q^2) i. Calculate profit with new technology/reduced costs at long equilibrium price form (2) --> P = 4.2--> P = MC for q--> 4.2 = 0.15 + 0.12q--> q = 33.75 --> Revenues = 33.75 x 4.2 = 141.75 --> Costs = 37.5 + 0.15(33.75) + 0.06(33.75^2) = 110.91 --> Profit = 141.75 - 110.91--> *Profit with new tech = 30.84* *Firms would be willing to pay UP TO the increased profit of new tech, which is $30.84, for the new tech*

Suppose P = 8; TC = 3 + 4q + q^2; MC = 4 + 2q 1) What is the producer surplus? 2) What is the profit? 3) What is another way to calculate profit?

1) Producer surplus = 1/2(given P - P when supply = 0)(q at given P) --> P = MC = 4 + 2q--> supply curve! Height: --> Given P = 8 --> P = 4 + 2(0)--> P = 4 Width: --> (8) = 4 + 2q--> q = 2 PS = 1/2(8-4)(2)--> *PS = 4* 2) Profit = R - C --> q at P = 8--> q = 2 (8 x 2)-(3 + 4(2) + 2^2)--> *Profit = 1* 3) Profit = R - C = PS - FC = variable profit!

Po = 50 DWL = 5.68 billion, when price controls placed on natural gas Qs = 15.9 + 0.72Pg + 0.05Po Qd = 0.02 - 1.8Pg + 0.69Po 1) If Po = 60, what would be free market price of gas? 2) How large a deadweight loss would result if maximum allowable price of natural gas was = 6? 3) What would the price of oil have to be if the free market Pg = 6?

1) Set Qs = Qd--> 15.9 + 0.72Pg + 0.05(60) = 0.02 - 1.8Pg + 0.69(60) --> *Pg0 = 8.94; Q0 = 25.34* 2) DWL = 1/2(height of triangle)(width of triangle) Pg = 6--> price ceiling Height of DWL triangle: i. Find Qs for Pg = 6 --> 15.9 + 0.72(6) + 0.05(60) = 23.22 Qs ii. Since Qd = Qs for DWL, use Qs to find corresponding Pg on demand curve --> 23.22 = 0.02 - 1.8Pg + 0.69(60) = *$10.11 for 23.22 units* iii. Height = difference between supply/demand prices when Q = 23.22 and Pg = 6 --> (10.11-6) = *4.11* Width of DWL triangle: i. Width = difference between Q0 and Q at price ceiling --> 25.34 - 23.22 = *2.12* DWL = 1/2(2.12)(4.11) = *$4.36 billion!!! DWL* 3) Set Qs = Qd, with Pg = 6 --> 15.9 + 0.72(6) + 0.05Po = 0.02 - 1.8(6) + 0.69Po --> *Po = 48.44 when free market Pg = 6*

Demand for labor--> Dl = 4000-300w, with L = # workers demanded; w = hourly wage rate Supply of labor--> Sl = 200w 1) What is the equilibrium wage rate and quantity of labor? 2) Suppose minimum wage is set at $9 per hour. How many workers are demanded and supplied? How many workers are unemployed? 3) Do all workers benefit from minimum wage law? 4) Which group of workers will have LEAST difficulty finding work at minimum wage? A. Young and inexperienced workers. B. Low skilled workers. C. Highly educated workers. D. All of the above. 5) What is the deadweight loss from minimum wage = $9?

1) Set Sl = Dl --> 200w = 4000-300w --> *Equilibrium w = 8* --> *Equilibrium Q = 1600* 2) Dl = workers demanded/employer's side = 4000-300(9)--> *1300 workers demanded* Sl = workers supplied/employee's side = 200(9) = *1800 workers supplied* --> 1800-1300 = *500 workers unemployed* 3) No—some workers benefit from higher wage, but just like with rent control, some workers can't find work at higher wage/better pricing. 4) C. Highly educated workers. --> Highly skilled workers, would get hired immediately 5) Old w = 8; new w = 9 i. Plug new w into Dl to find Q --> Dl = 4000-300(9) = *1300* ii. Find P for Sl, when Q = 1300 --> 1300 = 200w--> *w = 6.5* iii. Height of deadweight loss = (new w) - (w at Q = 1300 on supply curve) --> Height = 9-6.5 = *2.5 height* iv. Width = equilibrium Q - Q at w = 9 --> 1600-1300 = *300 width* v. DWL = 1/2(height)(width) --> 1/2(2.5)(300) = *375 DWL*

Suppose a perfectly competitive firm's total cost of production is: TC = q^3 - 6(q^2) + 40q + 10 and MC = 3(q^2) - 12q + 40 1) What is the firm's short run supply curve (include the minimum price, if there is one)?

1) Short run supply equilibrium/where Profit = 0--> P = MC = AVC--> *Profit = 0 where MC = AVC, just like on the graph* i. Set P = MC = AVC -VC = TC - FC--> VC = q^3 - 6(q^2) + 40q -AVC = q^2 - 6q + 40 -MC = 3(q^2) - 12q + 40 ii. Set AVC = MC to find minimum equilibrium q to produce! q^2 - 6q + 40 = 3(q^2) - 12q + 40--> q = 0,3 --> q = 0--> P = 40 (AVC and MC not going to intersect at q = 0) --> q = 3--> P = 31--> this is the right answer! Since P = MC, supply curve = P = 3(q^2) - 12q + 40 *Supply curve is P = 3(q^2) - 12q + 40, as long as price > $31*

1) What is a subsidy? 2) How is impact of subsidy for inelastic vs. elastic demand? 3) What equation is a good predictor of where subsidy burden falls? 4) What 4 conditions must be satisfied for equilibrium, after subsidy is imposed?

1) Subsidy = gov't payment, reduces buyer's price and increases seller's price (negative tax) 2) i. *Inelastic demand* (steep) = benefit of subsidy goes to buyers (buyers have no chance of switching suppliers) ii. *Elastic demand* (flat) = benefit of subsidy goes to sellers (buyers switch suppliers after tax!) 3) Predictor of tax burden = elasticity of demand/elasticity of supply --> If Ed/Es is small = benefit of subsidy for buyers (demand = inelastic) --> If Ed/Es is large = benefit of subsidy for sellers (demand = elastic) 4) i. Quantity sold and buyer's price must lie on demand curve (buyers only interested in price they must pay) --> Qd = Qd(Pb) ii. Quantity sold and seller's price must lie on supply curve (sellers only interested in revenue they receive after tax) --> Qs = Qs(Ps) iii. Qd = Qs iv. Price buyer pays - price seller receives = tax

1) What is a tax? 2) How is impact of tax for inelastic vs. elastic demand? 3) What equation is a good predictor of where tax burden falls? 4) How do you calculate the pass through fraction? 5) What 4 conditions must be satisfied for equilibrium, after tax is imposed?

1) Tax = tax of good per unit sold, increase buyer's price and reduces buyer's price 2) i. *Inelastic demand* (steep) = burden of tax on buyers (buyers have no chance of switching suppliers) ii. *Elastic demand* (flat) = burden of tax on sellers (buyers switch suppliers after tax!) 3) Predictor of tax burden = elasticity of demand/elasticity of supply --> If Ed/Es is small = burden on buyers (demand = inelastic) --> If Ed/Es is large = burden on sellers (demand = elastic) 4) Pass through fraction = % of tax shouldered by buyers --> *Es/(Es-Ed)* 5) i. Quantity sold and buyer's price must lie on demand curve (buyers only interested in price they must pay) --> Qd = Qd(Pb) ii. Quantity sold and seller's price must lie on supply curve (sellers only interested in revenue they receive after tax) --> Qs = Qs(Ps) iii. Qd = Qs iv. Price buyer pays - price seller receives = tax

Consider a perfectly competitive market in which each firm's short run total cost function is C = 25 + 9q + q^2, where q = # units of output produced. Associated marginal cost is MC = 9 + 2q. 1) In the short run, each firm is willing to supply a positive amount of output at any price above...? 2) If the market price is $25, how many units will each firm produce in the short run? 3) How much profit will each firm earn, at the market price of $25? 4) Will firms enter/exit/not move in the long run? 5) Suppose the cost function is C = 25 + 9q + q^2 applies to both short run and long run, because the corresponding SAC is tangent to the LAC curve at the minimum point on the LAC curve. In the long run, how much would each firm produce? 6) What is the corresponding equilibrium price to (5)?

1) To find minimum price in short run--> set P = MC = AVC --> VC = 9q + q^2--> AVC = 9 + q --> MC = 9 + 2q --> 9 + 2q = 9 + q--> q = 0; *P = $9* 2) P = 25--> set equal to MC --> 25 = 9 + 2q--> *q = 8* 3) Profit = R - C --> (8 x 25) - (25 + 9(8) + 8^2)--> *Profit = $39* 4) In the long run, firms will ENTER if profit = positive --> So firms will enter in the long run! 5) Optimal profit minimizing amount to produce in long run = when profit is 0 = set P = MC = ATC --> ATC = 25/q + 9 + q --> MC = 9 + 2q --> 9 + 2q = 25/q + 9 + q--> *q = 5* 6) Corresponding equilibrium price = plug q into either function, since it's equal to P! --> P = MC = 9 + 2(5)--> *P = 19*

1) What maximizes producer and consumer surplus? 2) What is this a fundamental/fallacious argument for?

1) When there are no controls/gov't intervention, the same capitalist bull 2) Fundamental/fallacious argument for competitive markets and "invisible hand" bull and capitalism --> Competitive markets maximize CS + PS

1) What are the 3 basic assumptions that the model of perfect competition rests on? 2) What is the rule of thumb for describing whether a market is close to being perfectly competitive? 3) What are examples of price takers/givers?

3 assumptions for perfect competition: i. *Price taker*- firm with no influence on market price; TAKES price as given; typically in perfectly competitive market --> Each firm sells small proportion of total market output ii. *Free entry/exit*- no special costs/barriers to entry/exit industry (special costs = large, relative to the market) --> Encourages competition --> Buyers can easily switch from one supplier/seller to another --> So free entry/exit do NOT have barriers to entry = patents, copyrights, trademarks, trade secrets, special land/capital, occupational licenses iii. *Product homogeneity*- products of all firms are homogeneous/perfectly substitutable with one another --> No firm can raise price of products without losing most/all business --> Where price taking behavior typically occurs 2) There is NO simple rule of thumb! trick question, bich --> Must analyze firms and strategic interactions to determine this! 3) Price takers/competitive firms: corn farmers Price givers: Apple iphones In between: Nokia, Samsung

The production or consumption of an economic good that generates a positive externality results in... A. underproduction of the good and a price that is lower than marginal social benefit. B. overproduction of the good and a price that is higher than marginal social benefit. C. underproduction of the good and a price that is higher than marginal social benefit. D. overproduction of the good and a price that is lower than marginal social benefit.

A. underproduction of the good and a price that is lower than marginal social benefit. --> Underproduction of good + good is not priced at how much it's benefiting society

How do you derive market supply graphically? Suppose there are 100 firms, each with Qs = 2P - 6. What is the market demand?

Add Qs of each point, keeping P constant Market demand = (2P - 6)100 = 200P - 600

Suppose Pw = 40. D = 100-P; S = 2P-50. 1) Is the domestic country an exporter or importer? 2) What is the amount of exports/imports of the country? 3) Who benefits from this? 4) How much do they benefit? 5) Who loses from this? 6) How much do they lose? 7) What are the welfare effects?

If world price > domestic equilibrium price--> domestic country = exporter If world price < domestic equilibrium price--> domestic country = importer 1) Find equilibrium price and compare to world price! --> 100-P = 2P-50 P0 = 50 Q0 = 50 Equilibrium domestic price = 50 > Pw = 40!--> importer!* 2) Imports = price below equilibrium = shortage --> Imports = Qd - Qs (at world price) --> Imports = (100-(40)) - (2(40)-50) = 60(Qd) - 30(Qs) = *30 imports* 3) Consumers benefit! --> lower prices, demanding more 4) How much someone benefits = change in surplus! --> Change in consumer surplus = [CS at new world price] - [original area of CS at equilibrium domestic price] --> P when Qd = 0--> 0 = 100-P--> P = 100 --> CS at new world price = 1/2(bh) = 1/2(60 x (100-40 height from Pw to y intercept)) = 1800 --> CS at equilibrium domestic price = 1/2(bh) = 1/2(50 x (100 - 50 height from P0 to y intercept) = 1250 --> *Change in consumer surplus = 1800 - 1250--> *change in CS = 550* 5) Producers lose! --> lower prices, producing less = less profit 6) How much someone loses = change in surplus! --> Change in producer surplus = [PS at new world price] - [original area of PS at equilibrium domestic price] --> P when Qs = 0--> 0 = 2P - 50--> P = 25 --> PS at new world price = 1/2(30 x (40-25 height from y intercept to Pw) = 225 --> PS at equilibrium domestic price = 1/2(bh) = 1/2(50 x (50-25 height from y intercept to P0) = 625 --> Change in producer surplus = 225-625--> *change in PS = -400* 7) Welfare effects = change in CS + change in PS --> 550 + (-400) = *150 (also = area of triangle below equilibrium, with base = new price!)* --> society gains!

Chapter 9 Paper HW: 2) Currently, the social security payroll tax in the United States is evenly divided between employers and employees. Employers must pay the government a tax of 6.2% of wages they pay, and employees must pay 6.2% of wages they receive. Suppose the tax were changed so that employers paid the full 12.4% and employees paid nothing. Would employees be better off?

No, they would not be better/worse off. If the labor market is competitive (i.e., both employers and employees take the wage as given), then shifting all the tax onto employers will have no effect on the amount of labor employed or on employees' after-tax wages. We know this because the *incidence of a tax is the same regardless of who officially pays it.* As long as the total tax doesn't change, the same amount of labor will be employed, and the wages paid by employers and received by the employee (after tax) will not change. Hence, employees would be no better or worse off if employers paid the full amount of the social security tax.

When a tax is imposed... 1) What are the 4 conditions which must be met, when there is a tax? 2) How does consumer and producer surplus change? 3) What is the tax revenue? 4) What is new market clearing price and quantity?

Remember: -CS = difference between W+P and price paid by all consumers -PS = difference between price received and MC, for all q sold -P paid (consumers) = Pc -P received (producers) = Pp -t = tax in cents/unit (doesn't depend on price of good) -t = Pc-Pp 1) *4 conditions with tax:* i. Producers' p and q on supply curve ii. Consumers' p and q on demand curve iii. Qs = Qd iv. Price consumers pay = Price producers receive + tax (Pc = Pp + t) 2) --> Before tax: Original CS = J+K+I Original PS = M+L+Y --> After tax: CS after tax = J PS after tax = M 3) Tax revenue = K+L = (difference between CS and PS) x (Q at tax, same for S and D!) 4) Pc = Pp + t--> apply 4 conditions to derive market clearing values! New market clearing prices: -Price producer receives = P''' -Price consumer pays = P' New market clearing quantity: -Q at P' and P'''!--> This is due to condition iii. Qs = Qd :-D

1) The burden of a tax is shared by producers and consumers. Under what conditions will consumers pay most of the​ tax? Under what conditions will producers pay most of​ it? A. If demand is relatively less elastic than​ supply, producers will pay more of the tax. B. If demand is relatively more elastic than​ supply, producers will pay more of the tax. C. It depends on who is legally obligated to pay the tax. Typically consumers are required to pay the tax and therefore bear most of the burden. D. It depends on who is legally obligated to pay the tax. Typically producers are required to pay the tax and therefore bear most of the burden. 2) What determines the share of a subsidy that benefits​ consumers? A. If demand is relatively less elastic than​ supply, consumers will benefit more from the subsidy than producers. B. Subsidies are used to induce firms to produce more output and therefore are designed to benefit producers. C. If demand is relatively more elastic than​ supply, consumers will benefit more from the subsidy than producers. D. It depends on the type of subsidy.​ Obviously, if​ it's a consumer​ subsidy, the consumer receives the entire benefit.

Tax: Inelastic = most burden! Elastic = least burden! Subsidy: Inelastic = most benefit! Elastic = least benefit! 1) B. If demand is relatively more elastic than​ supply, producers will pay more of the tax. 2) A. If demand is relatively less elastic than​ supply, consumers will benefit

Let's examine the economics of a minimum wage and wage subsidies to help employers afford. Supply of low skilled labor: Sl = 10w Demand of low skilled labor: Dl = 80-10w --> Q in millions of people employed each year<-- 1) What is free market wage rate and employment level? 2) Suppose gov't sets minimum wage = 5.5. How many people would be employed then? 3) Suppose gov't pays subsidy of $1 per hour to each employee. What will the total level of employment and equilibrium wage rate be now?

Wage rate = price employment = quantity 1) Sl = Dl--> 10w = 80-10w --> *w = 4; employment or Q0 = 40* 2) Price floor of w = 5.5--> people employed = ? --> People employed = Qd by employers; will be surplus of workers looking for jobs! (workers > number of jobs open) --> Dl = 80-10(5.5) = *25 million people employed* 3) Subsidy = 1--> decreases wage rate paid by employers on demand line by $1 = (w-1) i. Plug new wage (w-1) into demand equation--> this is what employers are paying for subsidy now! (employer specific!) --> Sl = 10(w-1) ii. Set Sl = Dl to find equilibrium wage rate! --> New Dl = 80-10(w-1) --> 10w = 80-10(w-1)--> 10w-10 = 80-10w-10--> 20w = 90--> *new equilibrium w = 4.5* iii. Plug new equilibrium w into Sl, to find equilibrium employees demanded/employed --> Dl = 80-10(4.5-1)--> *45 million people employed per year*

Chapter 8 HW: 6) Suppose a competitive firm's cost function is C(q) = 6q + 5(q^2). The firm's marginal cost is MC = 6 + 10q. a) Derive the formula for the firm's supply curve. b) Graph the supply curve. c) For what prices does the firm supply zero?

a) Competitive firm's supply = P = MC! --> P = MC = *6 + 10q, for any P > 6* (or plug 0 into q to find minimum price for which firm will produce positive output!) b) q: 0;3;5 P or MC: 6;36;56 c) For P < 6 (including 6), supply or q = 0

Chapter 9 Paper HW: 4) Suppose the U.S. demand for sugar is Qd=28−0.1P and the U.S. supply of sugar is Qs=0.7P−4, where price is in cents per pound and quantity is in billions of pounds. Suppose the world price of sugar is 30 cents per pound. a. Graph the U.S. supply and demand. Calculate the U.S. equilibrium price and quantity if the U.S. did not trade with the rest of the world. Label this price and quantity on your graph. b. Suppose there is free trade with the rest of the world. Calculate the U.S. supply, demand, and imports. c. Calculate the welfare effects of trade on U.S. consumers and U.S. producers. Explain who benefits and who is harmed.

a) Equilibrium price/quantity without trade--> Qs = Qd 28−0.1P = 0.7P−4 --> *P0 = 40; Q0 = 24 billion* b) World P0 = 30 Domestic P0 = 40 i. Plug world P0 into Qd and Qs equations to find domestic demand/supply! --> US Qd = 28−0.1(30) = *25 billion Qd with trade* --> US Qs = 0.7(30)−4 = *17 billion Qs with trade* ii. Imports = Qd-Qs --> 25-17 = *8 billion imports* c) i. Welfare effect with free trade = change in CS + change in PS = triangle under equilibrium, since it's free trade --> 1/2(Qd at world P0 - Qs at world P0)(domestic P0 - world P0) --> 1/2(25-17)(40-30) = *40 welfare effect* --> OR add up change in CS and change in PS--> 245+(-205) = 40!!! yay!!! getting the hang of this :-) proud of you queen <3 ii. Change in CS = change from [triangle above equilibrium P=40] to [bigger triangle with world P=30 as base!] = [(Q0)(difference between domestic P0 and world P0)] + [1/2(Qd at world P0 - Q0)(difference between domestic P0 and world P0)] --> [(40-30)(24)]+[1/2(25-24)(40-30)] = *245, gain to consumers* iii. Change in PS = change from [triangle under equilibrium P=40] to [smaller triangle under world P=30] = [(Qs at world P0)(difference between domestic P0 and world P0)]+[1/2(domestic Q0-Qs at world P0)(difference between domestic P0 and world P0)] --> [(17)(40-30)]+[(1/2(24-17)(40-30)] = *-205, loss to producers* *Consumers benefit--> paying lower price, demanding more Producers are harmed--> producing and making less*

Chapter 8 HW: 7) Suppose a competitive firm's marginal cost function is MC(q) = 10 + 0.5q. a) Derive the formula for the firm's supply curve. b) Calculate the producer surplus if the price is $20.

a) P = MC for competitive firm = *P = 10 + 0.5q* b) PS = 1/2(q at given P)(given P - P intercept, when q = 0) Width: --> 20 = 10 + 0.5q--> q = 20 Height: --> Given P = 20 --> Minimum P = 10 + 0.5(0)--> P = 10 PS = 1/2(20)(20-10)--> *PS = 100*

Suppose large corporation produces airplanes in perfectly competitive industry. Price = $92,000. q: 0;1;2;3;4;5;6;7;8;9;10;11 C (in the thousands): 100;200;256;296;324;360;400;444;519;619;744;894 MC (in the thousands): —;100;56;40;28;36;40;44;75;100;125;150 a) Suppose capacity constraint = 11 airplanes. If the goal is to maximize revenue, how many airplanes should the firm produce? b) What will be firm's profit, if they produce the quantity from (a)? c) If the firm's goal is to maximize profit, how many airplanes should the firm produce? d) What will the firm's profit be, if they produce the quantity from (c)?

a) R = q x P--> since P is fixed at $92k, must maximize q--> *produce 11 airplanes to maximize revenue* (produce as much as you can!) b) Profit = total revenues - total costs--> ($92k x 11) - ($894k) = *$118,000 in profit* c) Maximum profit = when P = MC, or the closest MC < P (so that it's selling for more than it cost to make!) --> P = $92k --> MC that's closest to P = $75k --> Corresponding q = *8* d) Profit = total revenues - total costs--> (8 x $92k) - ($519k) = *$217,000 in profit*

Chapter 8 HW: 4) Suppose that a competitive firm's marginal cost of producing q is MC = 20 + 8q and the firm's average variable cost is AVC =20 + 4q. Assume the firm's fixed costs are $100 and that the market price of the firm's product is $60. a) Graph the firm's marginal cost curve. b) How much output will the firm produce? c) Calculate the firm's producer surplus and label it on the graph. d) Does the firm earn positive profit in the short run?

a) Remember, P = MC = supply curve! q: 0;1;5;9 MC: 20;28;60;92 b) Firm produces at P = MC--> which is where *q = 5* c) PS = 1/2(given P - P when q = 0)(q at given P) --> 1/2(60-20)(5)--> *PS = 100* d) Remember, this is asking for profit at given price, and optimal output! Profit = R - C (60 x 5) - (20(5) + 4(5^2)+100)--> *Profit = 0*

Chapter 9 Paper HW: 3) Suppose the demand for gasoline is given by Qd = 220−10Pb and supply is given by Qs = 40+30Ps, where prices are in $ per gallon and quantity is in billion gallons per year. Consider a tax of $0.80. a. Graph the demand and supply and calculate the equilibrium price and quantity if there is no tax. b. Calculate the equilibrium prices and quantity with the tax. c. Who bears most of the burden of the tax: consumers or producers? How much does each bear? d. Calculate the tax revenue and the deadweight loss of the tax. Illustrate on your graph. e. Calculate the welfare effects of the tax on consumers and on producers.

a) Set Qd = Qs for equilibrium values 220−10Pc = 40 + 30Pp --> *P0 = 4.5; Q0 = 175* b) t = 0.80 Pc = Pp+t--> plug into Qd, set equal to Qs to derive Pp! --> 220-10(Pp+0.80) = 40+30Pp--> *Pp = 4.3* --> Pc = 4.3+0.80--> *Pc = 5.1* Plug either Pp or Pc into Qd or Qs --> Qd = 220-10(4.3+0.80) = 169 --> Qs = 40+30(4.3) = 169 *Equilibrium Q with tax = 169* c) Burden of tax = (difference between P with tax and P0)/tax -Consumer burden = (5.1-4.5)/0.80--> *0.75 consumer burden* -Producer burden = (4.5-4.3)/0.80--> *0.25 producer burden* *Consumers bear most of the burden (as they usually do with taxes)* d) i. Tax revenue = (Pc-Pp)(equilibrium Q with tax) --> (5.1-4.3)(169) = *135.2 tax revenue* ii. DWL = 1/2(equilibrium Q - equilibrium Q after tax)(Pc-Pp) --> 1/2(175-169)(5.1-4.3) = *2.4 DWL* e) i. Welfare effects = change in CS + change in PS = tax revenue + DWL--> 135.2+2.4 = *-137.6 welfare effects* ii. Change in CS = (% burden borne)(tax revenue+DWL) --> 0.75(135.2+2.4) = *-103.2 change in CS* iii. Change in PS = (% burden borne)(tax revenue+DWL) --> 0.25(135.2+2.4) = *-34.4 change in PS*

Suppose competitive firm's marginal cost is MC(q) = 6 + 2q, and the price is P = 9. a) What level of output will the firm produce? b) What is the firm's producer surplus? c) Suppose AVC(q) = 6 + 1q, and FC = 20. Will the firm be earning a positive/negative/0 profit in the short run?

a) Since competitive firm should produce at P = MC, set MC equation = 9 --> 9 = 6 + 2q--> *q = 1.5* b) PS = area below price, above supply curve --> P = MC = supply!!!!! --> Height = segment between given P and price/MC at q = 0 (bc PS = P - MC) i. MC = 6 + 2(0)--> MC = 6 ii. P = 9 iii. Height = 9 - 6 = 3 --> Base = Qs = 1.5 --> Area = 0.5(1.5 x 3) = *2.25 producer surplus* c) Profit = total revenues - total cost --> Revenues = P x q--> 9 x 1.5 = 13.5 --> Costs = 20 + (AVC x q)--> 20 + (6+1(1.5) x 1.5)--> 20 + 11.25 = 31.25 *Profit = -$17.75, which is negative*

Chapter 9 Paper HW: 1) P: 3;6;9;12;15;18 US Supply: 2;4;6;8;10;12 US Demand: 34;28;22;16;10;4 Free market world price = 9 a) Confirm the demand curve is given by Qd = 40-2P, and supply curve is given by Qs = 2/3P. b) Confirm that if there were no restrictions on trade, the US would import 16 million pounds. c) If the US imposes tariff of $3/pound, what will be US price and level of imports? How much revenue will gov't earn from tariff? How large is deadweight loss? d) If US has no tariff but imposes import quota of 8 million pounds, what will be US domestic price? e) What is cost of this quota for US consumers of fiber? What is gain for US producers?

a) To confirm, simply plug values into Qd and Qs to make sure they correlate. --> Qd = 40-2(3) = 34 --> Qd = 40-2(12) = 16 --> Qs = 2/3(3) = 2 --> Qs = 2/3(12) = 8 All good! OR, set Qd = Qs, ensure that equilibrium P = 15 as table illustrates. b) If no restrictions on trade, would US import 16 million pounds? --> Imports = Qd-Qs (more Qd than Qs, since imports have lower price) --> No restrictions on trade--> world equilibrium P = 9 At P=9, Qd = 22; Qs = 6--> *22-6 = 16!* c) i. With tariff, Pw = 9 + 3 = *P=12 with tariff* --> At P=12, *Qs = 8; Qd = 16* ii. Revenue from tariff = tariff amount x imports = 3 x (16-8) = *24 in tariff revenues* iii. Remember, DWL for tariffs = two small triangles at either side of triangle under equilibrium (triangle under equilibrium = welfare effects/gains from free trade, w/o tariffs!) --> DWL = [1/2(Qs at import P with tariff - Qs at world P0 w/o tariff)(import P with tariff - world P0 w/o tariff)] + [1/2(Qd at world P0 w/o tariff - Qd at import P with tariff)(import P with tariff - world P0 w/o tariff)] --> DWL = [1/2(12-9)(8-6)]+[1/2(12-9)(22-16) = *12 DWL* d) Import quota = 8 million pounds = additional supply transferred to domestic sellers --> Domestic Qs = 2/3P + 8 --> Find new equilibrium price by setting Qs = Qd --> 2/3P + 8 = 40-2P--> *P = 12* e) i. Change in CS/consumers' loss = difference between [CS at free trade (where world price = 9)] and [CS at quota (where new domestic equilibrium = 12)] --> OG CS = big triangle on top of P=9 --> New CS = smaller triangle on top of P=12 --> Change in CS = rectangle+small triangle --> [(12-9)(16)] + [1/2(22-16)(12-9)] = *-$57 million loss to consumers* ii. Change in PS/producers' gain = difference between [PS at free trade (where world price = 9)] and [CS at quota (where new domestic equilibrium = 12)] --> OG PS = small triangle under P=9 --> New CS = bigger triangle under P=12 --> Change in PS = small rectangle+small triangle --> [(12-9)(6)] + [1/2(8-6)(12-9)] = *$21 million gain to producers*

Chapter 8 HW: 5) Suppose a competitive firm's cost function is C(q)=4(q^2) + 20. The firm's marginal cost is MC = 8q. a) Calculate the formulas for VC, FC, AC, AFC, and AVC. b) Graph AC, AVC and MC. c) Find the output that minimizes average cost. d) At what range of prices would the firm earn positive profit and produce positive output? e) At what range of prices would the firm earn negative profit and produce zero output?

a) VC = 4q^2 FC = 20 AC = 4q + 20/q AFC = 20/q AVC = 4q b) q: 1;3;5;7 AC: 24;18.67;24;30.86 AVC: 4;12;20;28 MC: 8;24;40;56 c) Minimum average cost = where MC and AVC intersect! --> Set MC = AVC --> 8q = 4q + 20/q--> *q = 2.24, or 5^0.5* d) Positive profit/positive output = where MC (or supply) > AVC--> plug q from (c) into MC or AVC equation to find corresponding P! --> 8(5^0.5)--> *Profit = positive when P > 17.89* e) Negative profit/zero profit = where MC (or supply) < AVC--> plug q from (c) into MC or AVC equation to find corresponding P! --> 8(5^0.5)--> *Profit = negative when P < 17.89*

1) Define/calculate/determine the following: i. Marginal Revenue ii. Profit maximizing point iii. Price monopolist charges iv. Quantity monopolist produces v. Price as a function of marginal cost, in relation to markup 2) Does monopoly market have supply curve? Why/why not?

i. MR = change in revenue/change in quantity = P+P(1/Ed) ii. Where MR = MC; or MR-MC=0 --> Or where (P-MC)/P = -1/Ed iii. Price monopolist charges = P on demand curve --> Markup of MC, depending on elasticity of demand (inelastic = higher markup; elastic = lower markup) iv. Quantity monopolist producers = Q where MR=MC v. P = MC/[1+(1/Ed)] 2) Monopolist market = NO supply curve; no 1-1 relationship between price and Qs --> Output depends on demand curve!

C = 1000 + 20q + 3(q^2) P = 200 1) Graph the fixed and variable costs. 2) What is the revenue function? 3) What is the marginal cost function? 4) What is the marginal revenue function? 5) What is the profit maximizing level of production? 6) What is the maximum profit at the level of production from (5)?

x = quantity of output; y = costs Fixed cost = 1000 Variable costs = 20q; 3(q^2) --> Just plug in q 2) Revenue = price x quantity produced = *200q* 3) MC = derivative of total cost = *20 + 6q* 4) MR = derivative of total revenue = *200* 5) Optimal level of production = when MR = MC --> 200 = 20 + 6q--> 180 = 6q--> *profit maximizing level of q = 30* 6) Profit = Revenues - Costs --> (200 x 30) - (1000 + 20(30) + 3(30^2)) = 6000 - 4300 = *$1700, which is the maximum profit firm can make*