Econ 115 Midterm 2

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Tina makes socks from labor (L) and machines(capital, K). The price of capital is r and the wage of labor is w. Suppose that Tina's production function isQ = 6sqrt(l*k)which has the marginal products MPL = 3√K/√L and MPK = 3√L/√K Show that the ratio of L to K used by Tina depends only on the ratio of the cost ofcapital to the wage; it does not depend on the number of socks that Tina produces.

(maximizes profits) MPL/MPK always= K*/L*= always equals w/r

Shutdown profit/loss=

-FC

Now find marginal Revenue given P(Q)=12-2Q

12-4Q

Suppose that GUESS WHAT Quantities: 1,2,3,4,5,6,7,8 have average costs of 18,16,12,10,15,22,24,29 (numbers correspond to one another), if inverse demand function is P=70-q, how many firms will be in the industry long term?

15 note: Q=q*n (N being firms).

Suppose a firm has two marginal costs, marginal accounting and marginal opportunity costs which both equal Q, what is the firms general marginal cost?

2Q

K stands for

Capital

What is the relationship between Marginal Cost and Average Cost curves:

If MC is below AC, then AC is falling. If MC is above AC, then ACis rising. (2) MC crosses AC at AC minimum

Pareto inefficient

a point that wastes the resources a society has that could make two or more parties happier without making someone unhappier

Pareto dominates when

allocation of resources A dominates allocation B if in moving from A-B but no one can be less happy through a change in allocation

when on Pareto frontier you

are Pareto efficient

MC(Q*)=AC(Q*) and this means that Q* is always ______ this is a very attractive property of_____________

at the minimum of average costs, Perfect competition market

taxes can be used to

avoid negative externalities from occurring

Market for corn is

essentially perfectly competitive

When there are losses?

firms exit, price goes up, erodes losses

Excludable good

individuals can be kept from consuming it

everything to the southwest of a point (on a graph)

is Pareto dominated by the point

Everything to the northeast of a point (on a graph)

is Pareto dominating that point

Beyond Pareto frontier is

literally impossible to achieve

trades are good unless

there is a good ol externality

To what level will a monopolist produce? and why?

when MR=MC this is the point when revenue is maximized

Rival good is

when consumption affects other persons consumption

to what level will a perfectly competitive firm produce? Why?

when p=AC Because they want to break even in the long run (including fixed costs)

Suppose two people don't know each other (or don't know each others preferences enough to swap). What mechanism can you think of that would help them obtain the Pareto Efficient allocation?

A market! If there was a market, prices would emerge that would facilitatePerson A selling their pasta and buying potatoes and person B selling their potatoes and buying their pasta.

Second welfare theorem says

Pareto efficient allocation in perf competitive market is only the initial allocation (governments can reallocate resources for equity and whatnot for new Pareto efficient)

The first wealth fare theorem of economics says

Pareto efficient if all markets were perfectly competitive

when within Pareto frontier

Pareto inefficient

What is the relationship between Marginal Cost and Average Variable Cost curves

(1) If MC is below AVC, then AVC is falling. If MC is above AVC, then AVC is rising. (2) MC crosses AVC at AVC minimum.

Suppose that Tywin Lannister is the only person capable of selling gold in Westeros, the marginal cost of mining each pound of gold is $70. He then turns around and sell his gold for $300 a pound. What is Tywins market power in the gold industry? What is the consumers price sensitivity?

(300-$70)/300=76%,.76 (Market power) Consumer price sensitivity= .76=1/x=.76x=1, 1/.76=1.31 (market power is inverse of price sensitivity)

Define a Monopoly

A market where there's only one seller in the market

Pegovian tax

A tax which raises revenue and social surplus by reducing negative externalities, you want tax to make firm produce at D=SMC

The relationship between Average Variable Cost and Average Cost curves

AC greater than AVC, As quantity increases, the two curves come closer together. (because fixed cost reduced over greater quantity)

Paretto Efficency is

An allocation of resources, what firms produce, how they produce these products, who consumes what

Sunk Costs

Costs that are unrecoverable even if the firm shuts down

With Free entry

Economic ECONOMIC not Accounting profits are driven to 0

EMC is

External MC

A and B are two people who are purchasing a widget in a perfectly competitive industry. Theyhave willingness to pay as follows wtpA > wtpB > ppc where ppc is the perfectly competitiveprice. A widget-maker successfully lobbies the government to introduce regulations that banall producers. The price changes to pm such that wtpA > pm > wtpB . Are the following true or false? Consumer A is not made worse off by the move to a monopoly Consumer B is not made worse off by the move to a monopoly

False. Under Perfect competition, Consumer A received wtpA−ppc. UnderMonopoly, Consumer A received wtpA −pm. As pm > ppc, the consumer surplus forconsumer has fallen and the consumer is worse off. False. Under Perfect competition, Consumer A received wtpb −ppc. UnderMonopoly, Consumer B does not purchase the product (as their willingness to payis less than the price) and so receives a consumer surplus of zero. This is less thanthe surplus they received under perfect competition and so they are made worse offby the move to monopoly.

when there are profits?

Firms enter, price goes down, profit erodes

Show that the allocation of goods across consumers in a perfectly competitive equilibriumleads to 'exchange efficiency'. That is, that there is no possibility for Pareto-Improving tradesbetween consumers. Note, this is essentially asking you to walk through the steps taken inour lecture. In your answer you can focus on the case where there are two goods and two consumers

First understand that to have a Pareto improving trade MUa>MUb, and MUa^2=MUb^2 (one person better off no one worse off) Now understand that mr. ^2 must have trade be so that 0=MUa^2-MUb^2 and MRS blank> MRS^2 HOWEVER we know that in a perfectly competitive market MRS blank =p1/p2 and MRS ^2= p1/p2 So MRS^2=MRS blank So these facts prove that there are no Pareto improving trades with goods bought in perf competitive market.

the MC is almost always upward sloping, this implies that

Increasing production in one factory and decreasing it in another would raise total production costs in the market

Price inelasticity of demand is

L = (changeQ/changeP) (P/Q)

How do we measure a monopolists power?

Lerners index: (P-MC/p) seeing by how much price exceeds marginal cost, also equals (1/AbS(elasticity of demand).

Optimal input approach means that

MCL=MRPL

expressing for marginal revenue is

MR= P2+(change in revenue/change in quantity)*Q1

Optimal output approach

MR=MC of Production

Demand curve in a perfectly competitive market

MR=demand

What is the marginal rate of substitution?

MU1/MU2=p1/p2

Moving along Pareto curve

Makes someone worst off, can't make one better off without making someone worst off if the utility is already on the Pareto frontier

Difference between marginal cost and AVC curves

Marginal cost curve measures the additional cost of producing one more unit while AVC is the average cost of labor per unit produced over Q So BIG Difference and MC runs the show on them graphs

Total revenue=

P*Q

Shutdown Choice inequality

P*Q*>VC (Operate) P*Q*<VC (Shutdown)

compute the exact value of the long run equilibrium price in a perfectly competitive market when all firms have this same cost function. How much will each firm produce? given:TC(Q) = 300 + 3Q^2 is Total cost function hint:derive MC if necessary

P=60

In a competitive equilibrium, all firms produce the quantity that

P=mc

Pareto efficient is when

No feasible allocation Pareto dominates a point on the graph, (Cant make someone better off without making someone else worst off)

holding total inputs constant....

No reallocation of inputs across firms that reduces costs

If you buy food in a perf competitive market, is there a trade that can make two people better off?

No! because they would've already maximized their utilities by buying things in the market for the same prices

Can you reallocate production in a long run equilibrium market even if one firm can produce more at a lower marginal cost?

No, because that firm is already producing at a rate where AC=P, to produce anymore would raise the production cost and thus prices, note the first firm is producing at the same AC in this scenerio as the more efficient company

Do fixed costs factor into the shutdown decision?

No, cause the fix cost would be lost whether or not the firm runs or shuts down

If firm in pc charges more than P they will sell

Nothing

But to Pareto improve

One person must be better off without someone not being worst off

If a point is Pareto efficient it doesn't necessarily

Pareto dominate all points within Pareto curve

Short-run formal definition

Period of time when one or more inputs of production cannot be changed

Non rival+ Nonexcludable is

Pure public good

To find Average ANYTHING divide by....

Q

Optimal input approach and optimal output approach should yield the same....

Q*

Now solve for Tina's choice of K as a function of r, w, and Q (you'll need to manipulatethe production function and substitute it into what you have derived in part (a) of thisquestion). This is called the "conditional input demand function"- the "conditional"references the fact that this is the demand for capital conditional on how many socksTina is producing. Does Tina's demand for K increase or decrease as w increases,conditional on Q?

Q/6*sqrt(w/r)

Whats the difference between Q and q?

Q:market quantity q:firm quantity

Now find profit maximizing quantity and price

Q=2, P=8

Study Break

Second Welfare theorem not on the exam!

when MC<AC then

Supply curve quantity is a 0

What is the substitution effect?

a change in relative prices

The Marginal Revenue Product is

The increased revenue from one additional labor unit input

P=AC what does this mean?

Then market is in equilbream

So in perf comp market

There are no Pareto improvements that can be made

What are the problems with Social Surplus as a measure of welfare? How does the concept of Pareto efficiency improve on them?

There are two problems with Social Surplus. The first is that it does not take into account distribution of welfare. It ignores how consumer surplus is distributed across consumers or producer surplus across producers. In particular, consumer surplus depends on the willingness to pay. Rich people have a higher willingness to pay then poor people, even though they don't necessarily derive higher utility from the product. The second problem is that social surplus focuses on one market at the time, ignoring the effects on the economy at large. Therefore, the social surplus measure may overstate the welfare generated by this market. A Pareto improvement occurs if some people are better off after some change, but no one is worse off. A Pareto-efficient situation occurs when all possible Pareto improvements have been made, and no further Pareto improvements are possible. Pareto improvements are desirable because, by definition, some people are better off, and no one is worse off. But a Pareto-efficient allocation may still not be a desirable situation. Like the social surplus, Pareto efficiency does not take fairness, or equity into account.

MR of monopolist is

U shaped (Upside down)

X and Y axis of a Pareto efficient are measured in

Utils

The first wealth fare theorem of economics is

What firms produce, how they produce these products, who consumes what.

Short-run often means

When profits or losses exist in a perfectly competitive market

Will outcome be PE if all markets were perfectly competitive?

Yes

MR can also=

change in total rev/change in quantity

An isoquant is a curve representing....

combinations of inputs that allow a firm to make aparticular quantity of output.

neg externality

cost imposed on some who aint got nothin to do with the damn transaction

Externality

cost or benefit affecting party not involved in transaction

Monopolists face a downward sloping

demand curve

SMC is

different from mc

Supply curve of a PC FIRM is

the part of the MC curve that's above/at the AVC curve

Draw a (large) graph. On your graph draw the following:i. Demand Curve (D)ii. Marginal Revenue Curve (MR)iii. Average Costs (AC)iv. Marginal Costs (MC)

n/a

On your graph mark the monopolist's optimal price (P∗m) and quantity (Q∗m). Indicate the monoplists' profit and the DWL of monopoly on your graph.

n/a

with Pareto efficency

no waste of potential opportunities (can't make something better without making one worst off)

in perfectly competitive market chosen X1,X2 such that MRS=.... so in perf MRSa=MRSb

p1/p2 (Price ratio)

Firms always choose that

p=MC(q*)

When Market perfectly competitive

production at minimum AVC (in the long run)

Given: TC(q) = 10 + 2q2 and P=20 and MC=4Q Find Profit and is the market in long run equilibrium

profit=40 Not in long run equilibrium since the firm is making a profit, so free entry and exit process has not yet driven profits to 0

To get market equilibrium

set dem=MC

to get social optimum

set dem=marginal social cost MSC=MS+neg externality

Neg externality graph

surplus all over but area between SMC=MC+EMC is negative surplus (the externality)

Income effect is

the change in someones spending habits as a result of their purchasing power increasing


संबंधित स्टडी सेट्स

Attributions: From Elements to Dispositions 4.2

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