ECO202 Exam2 Graphs

- 2.0

% change in price of milk = ($2.20 - $2.00)/$2.00 = .10 or 10% increase. The percentage change in quantity supplied is: % change in quantity supplied = (120 - 100)/100 = 20%. The elasticity of supply = 20/10 = 2.0

- Four units of output, although it would suffer a loss from doing so

According to the data in the table when the price is $4, the firm would produce four units of output, although it would suffer a loss from doing so. At this level of output, variable costs are $13 and the firm is selling the four units for a total of $16. This means the firm can apply the difference towards covering a portion of the fixed costs. So, in this case, the firm will be able to apply $3 toward the $17 fixed costs and only lose $14 in fixed costs. If the firm completely shut down, it would still lose the $17 in fixed costs.

- 8 units of output

According to the data in the table, profit is maximized at 8 units of output. The marginal principle tells us that the firm will maximize profit by choosing the quantity at which marginal revenue (the market price) equals marginal cost. As long as marginal revenue is greater than the marginal cost, the firm will benefit by increasing the output.

- $43.33

According to the data in the table, the marginal cost of producing the 640th pizza is $43.33. When you move from producing 625 pizzas to producing 640 pizzas, the total cost increases from $4,050 to $4,700, which is an increase of $650. Therefore, it costs $650 to produce another 15 pizzas (640 pizzas minus 625 pizzas = 15 pizzas). So, the marginal cost of producing that last pizza is equal to $650 / 15 = $43.33.

- Bookstores that sell more than 80,000 books per month

According to the graph, bookstores that sell more than 80,000 books per month are more likely to experience diseconomies of scale. As you can see, in the graph, when bookstore sales exceed 80,000 books per month the long-run average cost curve begins to slope steeply upward. This indicates long-run average costs are increasing rapidly beyond this point.

- Diminishing returns

According to the graph, diminishing returns are more likely to occur when moving from point A to point B. As you can see, the slope begins to flatten indicating that marginal product of labor is falling. Each additional worker beyond this point will have a smaller marginal product. Division of labor is what allows increasing returns over the range of output from zero units to point A.

- 8 shirts per minute

According to the graph, profit will be maximized at an output of 8 shirts per minute. Profit maximization occurs at the level of output that generates the largest vertical distance between the two curves.

- Point d

According to the graph, the shut-down point corresponds to Point d. At point d the price only covers the variable cost and does not contribute any money towards fixed costs. Therefore, at this point the firm would be indifferent to shutting down or continuing operations. Either option would have the same result.

- When the third worker is hired

According to the table of data, diminishing returns in the production of pizzas begin when the third worker is hired. The marginal product of labor goes from 250 when the second worker is hired to 100 when the third worker is hired. This decline illustrates the law of diminishing returns.

- $5.00

According to the table, the average total cost of producing 550 pizzas $5.00 per pizza. The average total cost is equal to the total cost divided by the output produced. Therefore the average cost is equal to $2,750 / 550 = $5.00.

- Foregone salary and foregone interest

According to the table, the foregone salary and foregone interest are the only implicit costs listed. These are the costs associated with giving up one alternative to pursue another. They are also implicit costs since they are not costs you actually pay out-of-pocket, but instead represent monies you could have received had you selected another option. All other costs are explicit, or out-of-pocket costs the firm must make.

- Curve 2

Based on the relationship between marginal and average product, Curve 2 appears to be the average product curve. When marginal product is greater than average product, the average product curve will be rising and when marginal product is lower than the average product the average product will be falling. For this reason, Curve 1 has to be the marginal product curve and Curve 2 is the average product curve.

- Between 20,000 and 40,000 books

Constant returns to scale occur where the firm's long-run average costs are flat. At some point, these costs will begin to increase and the firm will begin to experience diseconomies of scale. In this graph, the point of increasing long-run average costs begins at 40,000 books and continues thereafter.

- Output increases at an increasing rate.

From the origin up until point A in this graph output increases at an increasing rate. Because of the benefits of specialization and the division of labor output will first increase at an increasing rate. During this phase of production each additional worker hired causes production to increase by more than the hiring of the previous worker.

- Graph B

Graph B is representative of a typical average total cost curve. The average total cost curve is typically U-shaped because costs fall initially as production increases, then flatten out for a period of time, and then begin to rise as the law of diminishing returns kicks in and the marginal product of the variable input begins to fall. Graph A looks more like a total output curve and Graph C is more typical of a total cost curve.

- Q3

In reference to the graph, this perfectly competitive firm will maximize profit at Q3. Profit is maximized at the point where marginal revenue is equal to marginal cost. As long as marginal revenue exceeds marginal cost, the firm can make additional profit by producing that next unit. However, at some point diminishing marginal returns will increase marginal cost to the point where it will eventually be equal to marginal revenue. At this point, the profit is maximized.

- 8

Marginal utility is the utility gained from the consumption of the next unit of some good or service. In this case, total utility increases from 10 utils to 18 utils after consuming the second ice cream cone. Therefore, the marginal utility of the second ice cream cone is equal to 18 - 10 = 8 utils.

- The graph on the left

The graph on the left best depicts an industry in which the firm's average costs decrease as the industry expands production. In the long run, competition will force the price of the product to fall to the level of the new lower average cost of the typical firm. In this case, the long-run supply curve will slope downward. Industries with downward-sloping long-run supply curves are called decreasing cost industries.

-Negative economic profit

The shaded area in the graph represents negative economic profit for a perfectly competitive firm that produces at output level Q. At that level of output, the average total cost is higher than the price the firm receives for the product. Therefore, the distance between price and average total cost multiplied by the number of units sold (the shaded area) is the total loss for this firm. The total cost of producing Q is equal to ATC x Q. Positive economic profits will only occur if price is higher than ATC.

- No other firms will enter this market

According to the graphs, no other firms will enter this market in the long run. Firms will enter a market only if they expect to make an economic profit. Firms will leave a market if they are suffering losses. In this case, the price is equal to the average cost at the chosen quantity, so there is zero economic profit, and therefore, no incentive to enter or exit the market.

- $250

According to this graph, the perfectly competitive firm is earning negative economic profit at a price of $250. At that price, the average total cost is higher than price which results in a loss represented by the shaded area. At a price of $495, the firm will opt to produce where MR = MC and it will earn an economic profit. In both cases, firms will exit ($250 price) or enter ($495 price) the market until price adjusts to the point where it is equal to average total cost.

- The firm will decrease its output and suffer losses.

As the market demand shifts to the left, the firm will decrease its output and suffer losses. Price will fall and the firm will reduce output to the point where marginal revenue is equal to marginal cost. However, as long as this point is higher than average variable cost the firm will continue to produce at a loss. Any revenues that exceed average variable cost can at least be applied to cover a portion of the fixed costs.

- Curve 2

Based on the relationship between average total cost and marginal cost, Curve 2 appears to be average total cost. When marginal cost is greater than average cost, the average cost curve will be rising, and when marginal cost is lower than the average cost the average cost will be falling. For this reason, Curve 1 has to be the marginal cost curve and Curve 2 is the average cost curve.

- 24

You derive 18 utils of satisfaction from consuming the first two ice cream cones and an additional 6 utils in marginal utility when you consume the third ice cream cone. Therefore, your total utility from consuming the three ice cream cones is 18 + 6 = 24 utils of satisfaction.

- The firm earns zero economic profit.

According to the graph, if a perfectly competitive firm is producing at point A, the firm earns zero economic profit. The firm is producing where price is equal to the average total cost, so economic profit is equal to zero. A loss would occur if the marginal revenue was below average total cost and a positive economic profit occurs when marginal revenue is higher than average total cost. In all cases, the firm will maximize profits or minimize losses at the point where marginal revenue equals marginal cost.

- The demand curve on the left

The demand curve on the left shows a perfectly inelastic demand. When a product has inelastic demand it is not sensitive to a change in price. As you can see the quantity demanded remains constant at 20 for the curve on the left regardless of price. The demand curve on the right is perfectly elastic since a price change shifts the quantity demanded to zero.

- 20,000 books

According to the graph, 20,000 books represent the minimum efficient scale in bookselling. The minimum efficient scale occurs at the level of output where all economies of scale have been exhausted. In the graph, you can see that long-run average costs are falling until you reach 20,000 books and then constant returns to scale engage and long-run average costs are flat.

- Demand curve 2

According to the graph, Demand curve 2 is associated with the shutdown point for this perfectly competitive firm. At Demand 2, the firm is at the point where marginal revenue exactly equals average variable cost so there is no reason to continue production. In the short run, the firm will continue to produce as long as marginal revenue exceeds average variable cost since the difference will at least cover a portion of fixed costs. However, when marginal revenue falls below average variable cost the firm is losing money with each additional unit of output so it will not be producing at this point which is consistent with Demand 1. At Demand 4, the firm is making zero economic profit since marginal revenue equals average total cost. The firm will continue to produce at this point.

- $2,400

According to the graph, the value of total fixed cost for this perfectly competitive firm is $2,400. At 100 units of output, the firm is generating $5,800 in total costs, of which $3,400 is variable cost. Therefore, the fixed cost is the difference of $5,800 - $3,400 = $2,400.

- Point D is a short-run equilibrium and point C is the new long-run equilibrium.

In this graph, the market is initially in long-run equilibrium at point A. If this is a constant-cost industry, after the decrease in demand, point D is a short-run equilibrium and point C is the new long-run equilibrium. When demand shifts to the left, the new equilibrium price will be $7 at point D. As time passes, firms will begin to exit this market since they are experiencing economic loss. The exit of these firms will shift the supply curve to the left and push prices back up to $10 at the long-run equilibrium point C.

- profit in the short run

The perfectly competitive firm represented in the graph on the right is experiencing a profit in the short run. The firm will produce where marginal cost intersects marginal revenue. At that point, the marginal revenue is higher than average total cost which means the firm is making an economic profit. In the long run, these profits will attract other producers to this market and the price will fall until it equals the average total cost.