Micro Lecture 10: Supply and Profit Maximization

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Micro Lecture 10: Supply and Profit Maximization"

Transcription

1 Micro Lecture 10: Supply and Profit Maximization President Clinton s Level Playing Field Health Insurance Argument On April 7, 1994, President Clinton (Hilary s husband) held a town meeting at the KCTV television studios in Kansas City, Missouri. He fielded a variety of uestions concerning his health care proposal. One uestion was posed by Herman Cain, president and chief executive officer of Godfather Pizza, Inc. Mr. Cain feared that Clinton s proposal would raise his costs, hurt his business, and force him to lay off workers. President Clinton agreed that costs would rise, but argued that since the costs of all pizza firms would increase, Godfather would not suffer:..., so [for] you [the health proposal] would add about one and one-half percent to the total cost of doing business. Would that really cause you to lay a lot of people off if all your competitors had to do it too? Only if people stop eating out. If all your competitors had to do it, and your cost of doing business went up one and one-half percent, wouldn't that leave you in the same position you are in now? Why wouldn't they all be in the same position, and why wouldn't you all be able to raise the price of pizza two percent? I'm a satisfied customer. I'd keep buying from you. President Clinton emphasizes that the costs of all pizza firms will be increased by his health care proposal. He contends that since his proposal would increase the costs of all pizza firms, an individual firm would not be hurt. In other words, since everyone s costs have risen the playing field will still be level. Accordingly, no one firm will be hurt. Do you agree or disagree with the President s analysis? We will begin our assessment our President Clinton s argument by focusing on the market supply curve. Two Questions First Question: Where does the market supply curve come from? We will show that the market supply curve is the horizontal sum of each firm s individual supply curve. Second Question: Where does an individual firm s supply curve come from? That is, how does a firm decide how much output to produce? First Question: Where Does the Market Supply Curve Come From? Individual Firm s Supply Curve: Firm A P How many cans of beer would Firm A produce (Firm A s uantity If P=2.00 supplied), if the price of beer were, given that everything If P=1.50 else relevant to beer production remains the same. If P=1.00 S A Figure 10.1 illustrates the individual supply curve for Firm A. If P=.50 Figure 10.1: Firm A s supply curve

2 2 Market Supply Curve How many cans of beer would firms produce (the uantity supplied), if the price of beer were, given that everything else relevant to beer production remains the same. As figure 10.2 illustrates the market supply curve is the horizontal sum of each individual firm s supply curve. P If P=2.00 If P=1.50 If P=1.00 Firm A Firm B Market P P S A S B S If P=.50 Figure 10.2 Constructing the market supply curve Q Second Question: Where does an individual firm s supply curve come from; that is, how does a firm decide how much output to produce? Profit: The Firm s Goal Question: What is a firm interested in? Answer: Profit. What does profit eual? Profit = Total Revenues Total Costs = TR TC The firm will produce that uantity of output that makes its profit as large as possible; that is, the firm will produce its profit maximizing uantity of output. Your New Job: Consultant Mr. Busch, the president of Anheuser-Busch, hires you as a consultant. He wants to know if he is producing the profit maximizing uantity of beer; that is, Is Anheuser-Busch presently maximizing profit? If not, should more beer be produced or should less beer be produced? Question: What information would we need to determine whether or not a firm was maximizing its profits? That is, what information would we need to determine whether or not a firm is producing its profit maximizing uantity of output? Claim: We need to know the firm s marginal revenue and marginal cost: Marginal Revenue (MR) = Change in the firm s total revenue resulting from a one unit change in output. Marginal Cost () = Change in the firm s total cost resulting from a one unit change in output. More specifically, a firm is maximizing its profits only if marginal revenue euals marginal cost.

3 3 To convince you of this, first we will show that whenever marginal revenue exceeds marginal cost, the firm can increase its profits by producing more; to do so, suppose that MR = $1.00 and =$.80 If one more unit of If one more unit of output were produced output were produced TR would rise by $1.00 TC would rise by $.80 What would happen to profit if one more unit of output were produced? Profit = TR TC Since total revenue rises by $1.00 and total costs rises by only $.80, profits would increase by $.20. In general, whenever marginal revenue is greater than marginal cost, profit can be increased by producing more output. Next, we want to show that whenever that marginal revenue is less than marginal cost a firm can increase its profit by producing less; to do this, suppose that MR = $1.00 and =$1.10 If one less unit of If one less unit of output were produced output were produced TR would fall by $1.00 TC would fall by $1.10 What would happen to profit if one more unit of output were produced? Profit = TR TC Since total revenue falls by $1.00 and total costs falls by $1.10, profits would increase by $.10. In general, whenever marginal revenue is less than marginal cost, profit can be increased by producing less output. Generalizing: If marginal revenue exceeds marginal cost, a firm can increase its profit by producing more output. is less than marginal cost, a firm can increase its profit by producing less output. Therefore, whenever profits are being maximized, marginal revenue must eual marginal cost: MR > MR = MR < More production Profit Less production increases profit maximized increases profit Now what should we do? We will look at marginal revenue and marginal cost more carefully.

4 4 Marginal Revenue Curve This week we will study perfectly competitive industries, industries that are composed of a large number of small independent firms. In a perfectly competitive industry, no single firm's production decision can affect the price significantly; conseuently, each firm takes the price as a given, as a constant: Perfectly competitive industry Large number of small independent firms No single firm s production decisions can affect the price significantly. Each firm takes the price as a given, as a constant The American wheat industry provides a good example of a perfectly competitive industry. There are thousands of wheat farmers in the U.S. each of whom produces only a tiny fraction of total wheat production. That is, the wheat industry is composed of a large number of small independent firms. If one wheat farmer in Kansas decides to grow another bushel of wheat, will he/she have a significant effect on the price of wheat? Of course not. Claim: In a perfectly competitive industry, each firm s marginal revenue just euals the price of output. To justify this claim, let us review the definition of marginal revenue: Marginal Revenue (MR) = Change in the firm s total revenue resulting from a one unit change in output. What does a firm s total revenue eual? Suppose that the firm produces units today: Total Revenue Today = Price Quantity = P = P Constant in a perfectly competitive industry What happens when a firm in a perfectly competitive industry produces one more unit tomorrow, when increases from to + 1? Total Revenue Tomorrow = Price Quantity = P + 1 = P + P Constant in a perfectly competitive industry Note that the price is taken as a constant in a perfectly competitive industry. Since the uantity of output increases by 1 and the price remains constant, the firm s total revenues will rise by an amount just eual to the price. Therefore, marginal revenue euals the price in a perfectly competitive industry: Marginal Revenue = Price

5 5 As shown in figure 10.3, the marginal revenue curve of a perfectly competitive firm is horizontal, just eual to the price. MR Firm s Marginal Revenue Curve Price MR = Price Figure 10.3: Marginal revenue curve under perfect competition Marginal Cost Curve We will argue shortly that the marginal cost exhibits a phenomenon call increasing marginal cost. To do so, however, we will first discuss a less subtle phenomenon, increasing total cost. In this way, we will appreciate more fully exactly what increasing marginal cost is all about. Increasing Total Cost: As a firm produces more output, its total cost increases. It is easy to justify the notion of increasing total cost. To produce more output, a firm must use more labor, materials, etc.; conseuently, as a firm produces more output, its total costs must increase. This is not a very sophisticated idea. It is very straightforward. Increasing Marginal Cost: As a firm produces more output, its marginal cost (that is, the change in its total cost resulting from a one unit change in production) increases. This is a much more subtle notion. The notion of increasing marginal cost reflects the same phenomenon as the notion of decreasing marginal product. Marginal Product of Labor: Change in the uantity of output produced resulting from a one unit change in the amount of labor hired. Decreasing Marginal Product: As a firm hires more labor, the marginal product of labor (that is, the change in production resulting from a one unit change in labor) decreases. We will use an example to explain the notions of increasing marginal cost and decreasing marginal product to show that they are euivalent. That is, we will argue that they are two different ways of viewing the same phenomenon.

6 6 Example of Increasing Marginal Cost: Atkins' Apple Orchard This homespun example illustrates why a firm s marginal cost increases as the firm produces more output. Atkins Apple Orchard is located in South Amherst. Mr. Atkins, the owner of the orchard, hires a worker to pick the apples. Apple picker is paid $10.00 per hour. The first column of table 10.1 represents the uantity of labor hired by Mr. Atkins; the second column the total number of apples picked; and the third column marginal product of labor. What is marginal product of labor? Marginal Product of Change in the uantity of output produced resulting from a = Labor one unit change in the amount of labor hired Labor Hired Total Apples Picked Marginal (hours) (bushels) Product of Labor Table 10.1 Let us now explain why the numbers in the table are sensible. Obviously, the first row makes sense. If Mr. Atkins hires no labor, no apples will be picked. If a worker is hired for one hour, he/she will walk from tree to tree, picking apples within arm s reach. The table reports that in one hour, a worker can pick 1 bushel of apples in this way. When we move from 0 hours of labor hired to 1 hour of labor hired, total apple production rises from 0.0 to 1.0 bushel; conseuently, the marginal product of the first hour of labor is 1.0 bushel. Now, what if the worker is hired for a second hour? He/she will continue to pick apples within arm s reach and will be able to pick a total of 2 bushels of apples in the 2 hours. When we move from 1 hour of labor hired to 2 hours, total apple production rises from 1.0 to 2.0 bushels; conseuently, the marginal product of the second hour of labor is still 1.0 bushel. What happens if the worker is hired for a third hour? More of the same. The worker continues to pick apples within arm s reach and will pick a total of 3 bushels in the 3 hours. When we move from 2 hours of labor hired to 3 hours, total apple production rises from 2.0 to 3.0 bushels; conseuently, the marginal product of the third hour of labor is still 1.0 bushel. The situation changes if the worker is hired for the fourth hour, however. The worker runs out of apples within arm s reach. Picking apples now becomes a more time-intense operation. The worker must use a ladder and move the ladder from tree to tree. Accordingly, total apple production only rises from 3.0 to 3.6 bushels of apples when four hours of labor are employed; conseuently, the marginal product of the fourth hour of labor decreases to 0.6 bushels. If the worker is hired for a fifth hour, marginal product diminishes again because the worker must now go after apples that are less accessible so it takes him/her longer to pick them. When we move from 4 hours of labor hired to 5 hours, total apple production rises from 3.6 to 4.0 bushels; conseuently, the marginal product of the fifth hour of labor decreases to 0.4 bushels.

7 7 Summary: What happens to marginal product as more labor is hired? Eventually, marginal product of labor decreases. This is known as diminishing marginal product: as more labor is hired the additional output resulting from an additional unit of labor diminishes. This is a general phenomenon experienced by all firms. It is easy to understand why this phenomenon occurs in the context of our apple orchard example. The reason is clear: diminishing marginal returns set in after the apple picker works 3 hours when he/she runs out of apples within arm s reach. When this occurs picking apples becomes much more time-intensive because the worker must go after apples that are less accessible. Conseuently, as more labor is hired, marginal product of labor diminishes. Now, we will use the table 10.1 to calculate Mr. Atkins cost of producing apples reported in table 10.2: Apples Picked Labor Hired Total Labor (bushels) (hours) Cost 0 0 $ Table 10.2 To justify the total labor cost column in table 10.2, keep in mind that the apple picker is paid $10 per hour. If he decides to produce no apples, Mr. Atkins would hire no labor; conseuently, his labor costs would be 0. 1 bushel of apples, he must hire 1 hour of labor; his total labor costs would be $10. 2 bushels of apples, he must hire 2 hours of labor; his total labor costs would be $20. 3 bushels of apples, he must hire 3 hours of labor; his total labor costs would be $30. 4 bushels of apples, he must hire 5 hours of labor; his total labor costs would be $50. Next, calculate his marginal cost. Recall the definition of marginal cost: Marginal Cost () = Change in the firm s total cost resulting from a one unit change in output. The change in Mr. Atkins total costs is the marginal cost as reported in the last column of table 10.3: Apples Picked Labor Hired Total Labor Marginal (bushels) (hours) Costs Cost 0 0 $ Table 10.3 Marginal costs increase when diminishing marginal product sets in; that is, marginal cost increases after the apple picker works for 3 hours when he/she runs out of apples within arm s reach. Note that increasing marginal cost and diminishing marginal product are two sides of the same coin.

8 8 As a conseuence of diminishing marginal product, the firm s marginal cost increases as the firm produces more output; that is, the marginal cost curve is upward sloping as shown in figure A Firm's Production Decisions How many cans of beer would the firm produce? Figure 10.4: Marginal cost curve We can now answer this uestion. Recall that marginal revenue and marginal cost determines the firm s profit maximizing uantity of output: MR > MR = MR < More production Profit Less production increases profit maximized increases profit Also, recall what we have just learned about the marginal revenue and marginal cost curves: Marginal Revenue (MR) Curve Marginal Cost () Curve Horizontal Upward sloping MR = Price * is the firm s profit maximizing uantity of output because marginal revenue euals marginal cost when the firm is producing * units as shown in figure If the firm were to produce less than * units, the firm would not be content because marginal revenue would exceed marginal cost; when marginal revenue is greater than marginal cost, the firm could increase it profit by producing more. Similarly, if the firm were to produce more than *, it would not be content because marginal revenue would fall short of marginal cost; when marginal revenue is less than marginal cost, the firm could increase it profit by producing less. MR, Price MR = Price * MR > MR < Figure 10.5: Profit maximization

9 Micro Lecture 11: Supply, the Short Run, and the Long Run Review: Market Supply Curve Two Questions First Question: Where does the market supply curve come from? We will show that the market supply curve is the horizontal sum of each firm s individual supply curve. Second Question: Where does an individual firm s supply curve come from? That is, how does a firm decide how much output to produce? First Question: Where Does the Market Supply Curve Come From? Individual Firm s Supply Curve: Firm A P How many cans of beer would Firm A produce (Firm A s If P=2.00 uantity supplied), if the price of beer If P=1.50 were, given that everything else relevant to beer production If P=1.00 remains the same. Figure 11.1 illustrates the individual If P=.50 supply curve for Firm A. Figure 11.1: Firm A supply curve S A Market Supply Curve How many cans of beer would firms produce (the uantity supplied), if the price of beer were, given that everything else relevant to beer production remains the same. As figure 11.2 illustrates the market supply curve is the horizontal sum of each individual firm s supply curve. P If P=2.00 If P=1.50 If P=1.00 If P=.50 Firm A P Firm B P Market S A S B Figure 11.2 Constructing the market supply curve S Q

10 2 Second Question: Where does an individual firm s supply curve come from; that is, how does a firm decide how much output to produce? Firm s Goal: Maximize Profit Profit = Total Revenues Total Costs = TR TC Marginal Revenue and Marginal Cost Marginal Revenue (MR) Marginal Cost () Change in the firm s total Change in the firm s total revenue resulting from a one cost resulting from a one unit change in output. unit change in output. The relationship between marginal revenue and marginal cost tells us whether or not profit is maximized: MR > MR = MR < More production Profit Less production increases profit maximized increases profit Marginal Revenue and Marginal Cost Curves Figure 11.3 superimposes the marginal revenue and marginal cost curves to illustrate the profit maximizing uantity: 2.00 Marginal Revenue (MR) Curve Horizontal MR = Price Marginal Cost () Curve Upward sloping 1.50 If P = * MR> MR< MR = 1.00 Figure 11.3: Profit maximization when the price euals $1.00

11 3 Therefore, we have just found one point on the individual firm s supply curve, the point corresponding to a price of $1.00 per can. The blue point in figure 11.5 on the firm s marginal cost curve indicates how much beer the firm would produce if the price of beer were $1.00 per can. Accordingly, the blue point is on the individual firms supply curve If P = Profit maximizing uantity of output if P=1.00 MR = 1.00 Figure 11.4: Firm A s production when the price euals $1.00 How do we find another point on the individual firm s supply curve? Just choose another price. What if the price of beer were $1.50 per can? Then marginal revenue would eual 1.50: MR = 1.50 The firm s profit maximizing uantity of output is where its marginal revenue euals its marginal cost. The second blue point indicates the uantity of output the firm would produce if the price were $1.50 per can; conseuently, the second blue point in figure 11.6 is on the individual firm s supply curve also. Now, what do we observe? We have found two points that are on the individual firm s supply curve: the point representing the uantity supplied if the price were $1.00 per can and the point representing the uantity supplied if the price were $1.50 per can. These two points that lie on the supply curve also lie on the firm s marginal cost curve. It looks like the individual firm s supply curve is just its marginal cost curve. How can we be sure this is correct? Let us choose another price. What if the price were $.50 per can? Then marginal revenue would eual.50: MR =.50 The firm s profit maximizing uantity of output is where its marginal revenue euals its marginal cost. The third blue point indicates the uantity of output the firm would produce if the price were $.50 per can; conseuently, the third blue point in figure 11.7 is on the individual firm s supply curve also. Like the other two blue points, it lies on the firm s marginal cost curve also. If P = 1.00 Profit maximizing uantity of output if P=1.00 if P= Figure 11.5: Firm A s production when the price euals $1.50 Figure 11.6: Firm A s production when the price euals $.50 So, we have just shown that an individual firm s supply curve is its marginal cost curve. In reality, we must add one caveat to this statement. If the price becomes too low, a firm would have an incentive to go out of business rather than to continue to operate. We will address this in the next lecture..50 If P = 1.50 MR = 1.50 If P = 1.00 Profit maximizing uantity of output if P=.50 if P= if P=1.00 MR = 1.00 If P = 1.50 MR = 1.50 MR = 1.00 If P =.50 MR =.50

12 4 Short Run and Long Run: Going Out of Business To understand the behavior of firms, economists make a distinct between two time periods, the short run and the long run: Short Run: In the short run, a firm s actions are restricted by commitments which the firm made previously. For example, in the past, a firm may have entered into labor agreements, signed legal contracts, signed leases, etc. Long Run: However, commitments do not last forever. Labor agreements, contracts, and leases specify termination dates. The long run refers to the period of time after commitment expires. Preview: Going out of business in the short and long run: Short Run Long Run Price (P) and Price (P) and Average Variable Cost (AVC) Average Total Cost (ATC) P < AVC P < ATC Firm goes out of Firm goes out of business in the short run. business in the long run. Firm shuts down. Firm exits. Jeff Lord s Consulting Firm Until January 1, 2015, Jeff Lord, a business consultant, worked for Arthur Anderson earning a salary of $25,000 a month. Anderson Salary: $25,000 per month On January 1, 2015, he resigned from Arthur Anderson to start his own consulting firm. On that date: He signed a one-year lease for office space. The one-year lease legally reuires Jeff to pay his landlord $20,000 per month in rent until January 1, He hired several employees whose wages summed to $35,000 a month. All other out-of-pocket costs that Jeff incurs are negligible. Jeff departed from Anderson on very good terms; the management at Anderson told him that he could return to their firm anytime at his old $25,000 per month salary. Immediately after Jeff began his business he acuired several loyal clients. Jeff charges his clients $650 per hour and records 100 billable hours per month. In total, Jeff collects $65,000 from his clients each month. It is now easy to calculate his monthly income: Price = $650/hour Quantity: 100 hours Rent: $20,000 per month Total Revenues = P Employee Wages: $35,000 per month = = $65,000 per month Jeff s income when operating = $65,000 ( $20,000 + $35,000 ) his firm = $65,000 $55,000 = $10,000

13 5 Accounting Costs, Opportunity Costs, and (the Economist s) Total Costs We will now use Jeff s consulting firm to generalize our notions of costs. Figure 11.7 illustrates accounting costs, costs from the perspective of the accountant: Accounting Costs: Jeff s accounting costs are $55,000 per month. Accounting costs eual the payments the owner of the firm makes to others, the owner s out-of-pocket costs. In Jeff s case, accounting costs euals the rent Jeff pays his landlord and the wages he pays his employees: Accounting Costs = $20,000 + $35,000 = $55,000 Accounting Costs $55,000 Rent Employee Wages 20,000 35,000 Figure 11.7: Jeff s Accounting Costs We can now express the income Jeff earns when operating his firm more generally: Jeff s income when operating = $65,000 ( $20,000 + $35,000 ) his firm = $65,000 $55,000 = $10,000 = Total Accounting Revenue Costs In general, the income that an owner receives from his/her firm euals the firm s total revenue less its accounting costs. The economist s notion of costs is more inclusive than the accountant s. Economists include not only accounting costs but also opportunity costs. Recall the concept of opportunity cost: Opportunity Costs: Opportunity costs represent what the owner foregoes when he/she operates his firm. In Jeff s case, when he runs his firm, he must forego the salary he would have earned at Anderson. Jeff s Anderson salary is an opportunity cost: Opportunity Costs = $25,000 Total Costs: Total costs eual the sum of accounting and opportunity costs: Total Costs = $55,000 + $25,000 = $80,000 Total Costs (TC) $80,000 Accounting Costs Opportunity Costs $55,000 $25,000 Rent Employee Wages Anderson Salary $20,000 $35,000 $25,000 Figure 11.8: Jeff s Total Costs As seen in figure 11.8, total costs are the sum of accounting and opportunity costs.

14 6 The Short Run versus the Long Run Recall the short run/long run distinction we introduced earlier. Let s apply it to Jeff s firm. In Jeff s case, the date January 1, 2016 is critical it divides the short run from the long run: Short Run: In the short run, a firm s actions are restricted by commitments which the firm made previously. In Jeff s case, he signed a one-year lease which legally obligates him to pay $20,000 of rent to his landlord until January 1, Long Run: The long run refers to the period of time after the commitments expire. In Jeff s case, the long run begins when his lease expires on January 1, Short Run: Before January 1, 2016 The costs associated with a fixed commitment are called fixed costs: Fixed Commitments Fixed Costs Fixed Costs: Fixed costs represent costs that arise as a conseuence of short run fixed commitments. Fixed costs do not depend on the uantity of output produced. In Jeff s case, rent is a fixed cost as a conseuence of his one-year lease: Fixed Costs = $20,000 Total Costs (TC) $80,000 Accounting Costs Opportunity Costs $55,000 $25,000 Rent Employee Wages Anderson Salary $20,000 $35,000 $25,000 Fixed Costs (FC) $20,000 Figure 11.9: Jeff s Total Costs As illustrated in figure 11.9 Jeff s rent constitute his fixed costs. Question: Might it be advantageous for Jeff to go out of business and return to Arthur Anderson before January 1, 2016? That is, might it be advantageous for him to go out of business on October 1, 2015? Until January 1, 2016, Jeff is legally obliged to pay his landlord $20,000 of rent each month. This is a commitment that Jeff made previously when he signed the one-year lease. With this in mind, how much income would Jeff s be able to enjoy in each of the remaining months of 2015 if he goes out of business and returns to Anderson? Jeff s income if he goes out of business = $25,000 $20,000 = $5,000 on October 1, 2015 = Anderson Salary Rent = Opportunity Costs Fixed Costs Now compare the income Jeff would enjoy by continuing to operate his firm with the income he would earn if goes out of business on October 1, 2015 and working for Anderson? $10,000 per month by continuing to operate his own firm. $5,000 per month by going out of business and working for Anderson. Jeff will not go out of business in October 1, 2015.

15 7 Economists refer to all costs that are not fixed costs, all costs that are not bound by a fixed commitment, as variable costs as shown in figure 11.10: Variable Variable costs represent all costs that are not fixed in the short run: Costs: Variable Costs = Total Costs Fixed Costs = $80,000 $60,000 = $20,000 Generalizing: Total Costs (TC) $80,000 Accounting Costs Opportunity Costs $55,000 $25,000 Rent Employee Wages Anderson Salary $20,000 $35,000 $25,000 Fixed Costs (FC) Variable Costs (VC) $20,000 $60,000 Figure 11.10: Jeff s Total Costs Jeff s monthly income if he continues to operate his firm = TR Accounting Costs Jeff s monthly income if he goes out of business in the short run = Opportunity Costs Fixed Costs Question: In fact, Jeff would not go out of business in the short run, but under what circumstances would the owner of a firm to so? Income the owner earns when operating his/her firm < Income the owner earns if he/she goes out of business in the short run Total Revenues Accounting Costs < Opportunity Costs Fixed Costs Moving Accounting Costs to the right hand side Total Revenues < Accounting Costs + Opportunity Costs Fixed Costs Total Costs = Accounting Costs Opportunity Costs Total Revenues < Total Costs Fixed Costs Variable Costs = Total Costs Fixed Costs Total Revenues < Variable Costs P < VC P < VC P < AVC Dividing by AVC = VC

16 8 Shutdown and the a Firm s Individual Supply Curve Shutdown Rule: A firm will go out of business in the short run, shutdown, whenever the price is less than its average variable cost. Terminology: We use the term shutdown to refer to a firm going out of business in the short run Individual Firm s Supply Curve Individual Firm s Supply Curve: The individual firm s supply curve is its marginal cost curve until the price is very low and falls below average variable cost. When the price is less than average variable cost, the firm will shut down in the short run and produce nothing. See figure Curve Shutdown: P<AVC Figure 11.11: Individual firm s supply curve

Chapter 14: Firms in Competitive Markets. Total revenue = price per unit sold number of units sold = p q

Chapter 14: Firms in Competitive Markets. Total revenue = price per unit sold number of units sold = p q Chapter 14: Firms in Competitive Markets Profit and Revenue The firm's goal is to maximize profit. Profit = total revenue - total cost (opportunity cost) Total revenue = price per unit sold number of units

More information

Chapter 6 Competitive Markets

Chapter 6 Competitive Markets Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

More information

The Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a

The Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a In this chapter, look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine

More information

Number of Workers Number of Chairs 1 10 2 18 3 24 4 28 5 30 6 28 7 25

Number of Workers Number of Chairs 1 10 2 18 3 24 4 28 5 30 6 28 7 25 Intermediate Microeconomics Economics 435/735 Fall 0 Answers for Practice Problem Set, Chapters 6-8 Chapter 6. Suppose a chair manufacturer is producing in the short run (with its existing plant and euipment).

More information

PART A: For each worker, determine that worker's marginal product of labor.

PART A: For each worker, determine that worker's marginal product of labor. ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

More information

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to:

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Learning Objectives After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Discuss three characteristics of perfectly competitive

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

More information

ECON 600 Lecture 3: Profit Maximization Π = TR TC

ECON 600 Lecture 3: Profit Maximization Π = TR TC ECON 600 Lecture 3: Profit Maximization I. The Concept of Profit Maximization Profit is defined as total revenue minus total cost. Π = TR TC (We use Π to stand for profit because we use P for something

More information

Chapter. Perfect Competition CHAPTER IN PERSPECTIVE

Chapter. Perfect Competition CHAPTER IN PERSPECTIVE Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.

More information

Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

More information

11 PERFECT COMPETITION. Chapter. Competition

11 PERFECT COMPETITION. Chapter. Competition Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

More information

Problems on Perfect Competition & Monopoly

Problems on Perfect Competition & Monopoly Problems on Perfect Competition & Monopoly 1. True and False questions. Indicate whether each of the following statements is true or false and why. (a) In long-run equilibrium, every firm in a perfectly

More information

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY TEACHING NOTES This chapter begins by explaining what we mean by a competitive market and why it makes sense to assume that firms try to maximize profit.

More information

The table below shows the prices of the only three commodities traded in Shire.

The table below shows the prices of the only three commodities traded in Shire. Economics 101 Fall 2012 Homework #4 Due 11/20/2012 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly).

More information

Demand, Supply, and Market Equilibrium

Demand, Supply, and Market Equilibrium 3 Demand, Supply, and Market Equilibrium The price of vanilla is bouncing. A kilogram (2.2 pounds) of vanilla beans sold for $50 in 2000, but by 2003 the price had risen to $500 per kilogram. The price

More information

chapter >> Making Decisions Section 2: Making How Much Decisions: The Role of Marginal Analysis

chapter >> Making Decisions Section 2: Making How Much Decisions: The Role of Marginal Analysis chapter 7 >> Making Decisions Section : Making How Much Decisions: The Role of Marginal Analysis As the story of the two wars at the beginning of this chapter demonstrated, there are two types of decisions:

More information

DEMAND AND SUPPLY IN FACTOR MARKETS

DEMAND AND SUPPLY IN FACTOR MARKETS Chapter 14 DEMAND AND SUPPLY IN FACTOR MARKETS Key Concepts Prices and Incomes in Competitive Factor Markets Factors of production (labor, capital, land, and entrepreneurship) are used to produce output.

More information

Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test.

Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test. Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test. 1. Which of the following items is most likely to be an implicit cost of production? a.

More information

Chapter 8. Competitive Firms and Markets

Chapter 8. Competitive Firms and Markets Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,

More information

We will study the extreme case of perfect competition, where firms are price takers.

We will study the extreme case of perfect competition, where firms are price takers. Perfectly Competitive Markets A firm s decision about how much to produce or what price to charge depends on how competitive the market structure is. If the Cincinnati Bengals raise their ticket prices

More information

Chapter 13 Perfect Competition

Chapter 13 Perfect Competition Chapter 13 Perfect Competition 13.1 A Firm's Profit-Maximizing Choices 1) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics, Quiz #5 Fall 2007 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) Perfect competition

More information

Short-Run Production and Costs

Short-Run Production and Costs Short-Run Production and Costs The purpose of this section is to discuss the underlying work of firms in the short-run the production of goods and services. Why is understanding production important to

More information

Chapter 04 Firm Production, Cost, and Revenue

Chapter 04 Firm Production, Cost, and Revenue Chapter 04 Firm Production, Cost, and Revenue Multiple Choice Questions 1. A key assumption about the way firms behave is that they a. Minimize costs B. Maximize profit c. Maximize market share d. Maximize

More information

Profit Maximization. 2. product homogeneity

Profit Maximization. 2. product homogeneity Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out

More information

Technology, Production, and Costs

Technology, Production, and Costs Chapter 10 Technology, Production, and Costs 10.1 Technology: An Economic Definition 10.1 LEARNING OBJECTIVE Learning Objective 1 Define technology and give examples of technological change. A firm s technology

More information

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output.

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output. Ch. 9 1. Which of the following is not an assumption of a perfectly competitive market? A) Fragmented industry B) Differentiated product C) Perfect information D) Equal access to resources 2. Which of

More information

Competitive Market Equilibrium

Competitive Market Equilibrium Chapter 14 Competitive Market Equilibrium We have spent the bulk of our time up to now developing relationships between economic variables and the behavior of agents such as consumers, workers and producers.

More information

5. The supply curve of a monopolist is A) upward sloping. B) nonexistent. C) perfectly inelastic. D) horizontal.

5. The supply curve of a monopolist is A) upward sloping. B) nonexistent. C) perfectly inelastic. D) horizontal. Chapter 12 monopoly 1. A monopoly firm is different from a competitive firm in that A) there are many substitutes for a monopolist's product but there are no substitutes for a competitive firm's product.

More information

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and

More information

For instance between 1960 and 2000 the average hourly output produced by US workers rose by 140 percent.

For instance between 1960 and 2000 the average hourly output produced by US workers rose by 140 percent. Causes of shifts in labor demand curve The labor demand curve shows the value of the marginal product of labor as a function of quantity of labor hired. Using this fact, it can be seen that the following

More information

Chapter 12. The Costs of Produc4on

Chapter 12. The Costs of Produc4on Chapter 12 The Costs of Produc4on Copyright 214 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. What will you learn

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Test 2 Review Econ 201, V. Tremblay MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Barbara left a $25,000 job as an architect to run a catering

More information

The Markets for the Factors of Production. Derived Demand. Our Example: Farmer Jack. Two Assumptions

The Markets for the Factors of Production. Derived Demand. Our Example: Farmer Jack. Two Assumptions 8 The Markets for the Factors of roduction R I N C I E S O F ECONOMICS F O U R T H E D I T I O N N. G R E G O R Y M A N K I In this chapter, look for the answers to these questions: hat determines a competitive

More information

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run? Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MPP 801 Perfect Competition K. Wainwright Study Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Refer to Figure 9-1. If the price a perfectly

More information

COST THEORY. I What costs matter? A Opportunity Costs

COST THEORY. I What costs matter? A Opportunity Costs COST THEORY Cost theory is related to production theory, they are often used together. However, the question is how much to produce, as opposed to which inputs to use. That is, assume that we use production

More information

Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review

Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review 1. Implicit costs are: A) equal to total fixed costs. B) comprised entirely of variable costs. C) "payments" for self-employed

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Practice for Perfect Competition Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a defining characteristic of a

More information

The Cost of Production

The Cost of Production The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The

More information

Chapter 7: The Costs of Production QUESTIONS FOR REVIEW

Chapter 7: The Costs of Production QUESTIONS FOR REVIEW HW #7: Solutions QUESTIONS FOR REVIEW 8. Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing?

More information

Microeconomics Topic 7: Contrast market outcomes under monopoly and competition.

Microeconomics Topic 7: Contrast market outcomes under monopoly and competition. Microeconomics Topic 7: Contrast market outcomes under monopoly and competition. Reference: N. Gregory Mankiw s rinciples of Microeconomics, 2 nd edition, Chapter 14 (p. 291-314) and Chapter 15 (p. 315-347).

More information

Miami Dade College ECO 2023 Principles of Microeconomics Spring 2015 Practice Test #2

Miami Dade College ECO 2023 Principles of Microeconomics Spring 2015 Practice Test #2 Miami Dade College ECO 2023 Principles of Microeconomics Spring 2015 Practice Test #2 1. If a product's price rises by 6%, and its quantity demanded falls by 8%, then we can say that demand for this product

More information

Lab 12: Perfectly Competitive Market

Lab 12: Perfectly Competitive Market Lab 12: Perfectly Competitive Market 1. Perfectly competitive market 1) three conditions that make a market perfectly competitive: a. many buyers and sellers, all of whom are small relative to market b.

More information

Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions.

Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions. Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions. Reference: Gregory Mankiw s Principles of Microeconomics, 2 nd edition, Chapter 13. Long-Run

More information

CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION

CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION Chapter in a Nutshell Now that we understand the characteristics of different market structures, we ask the question

More information

AP Microeconomics Unit 5 Problem Set

AP Microeconomics Unit 5 Problem Set Goldwasser AP Microeconomics Unit 5 Problem Set NAME 1. For each of the following, is the industry perfectly competitive? Referring to market share, standardization of the product, and/or free entry and

More information

Price Theory Lecture 6: Market Structure Perfect Competition

Price Theory Lecture 6: Market Structure Perfect Competition Price Theory Lecture 6: Market tructure Perfect Competition I. Concepts of Competition Whether a firm can be regarded as competitive depends on several factors, the most important of which are: The number

More information

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

More information

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC. 1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

More information

CHAPTER 9: PURE COMPETITION

CHAPTER 9: PURE COMPETITION CHAPTER 9: PURE COMPETITION Introduction In Chapters 9-11, we reach the heart of microeconomics, the concepts which comprise more than a quarter of the AP microeconomics exam. With a fuller understanding

More information

ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS 23-1 Briefly indicate the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications

More information

Price Theory Lecture 4: Production & Cost

Price Theory Lecture 4: Production & Cost Price Theory Lecture 4: Production & Cost Now that we ve explained the demand side of the market, our goal is to develop a greater understanding of the supply side. Ultimately, we want to use a theory

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of July 14 Chapter 11 WRITE: [2] Complete the following labour demand table for a firm that is hiring labour competitively and selling its

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest

More information

Production and Cost Analysis

Production and Cost Analysis Production and Cost Analysis The entire production process begins with the supply of factors of production or inputs used towards the production of a final good we all consume in the final good market.

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

Midterm Review Questions

Midterm Review Questions Midterm Review Questions July 29, 2013 Consumer Theory 1. Parvez, a pharmacology student has allocated $120 per month to spend on paperback novels (N is the number of novels) and used CDs (C is the numbers

More information

CHAPTER 9 MAXIMIZING PROFIT

CHAPTER 9 MAXIMIZING PROFIT CHAPTER 9 MAXIMIZING PROFIT Chapter in a Nutshell In Chapter 8, we hinted at how you might determine whether a firm is making a profit or a loss by comparing the price of a good with its average total

More information

Chapter 7 Production Costs

Chapter 7 Production Costs Chapter 7 Production s MULTIPLE CHOICE Exhibit 1 Production of pizza data Workers Pizzas 1 4 2 1 3 15 4 18 5 19 Exhibit 1 shows the change in the production of pizzas as more workers are hired. The marginal

More information

Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013

Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on

More information

1 The Market for Factors of Production Factors of Production are the inputs used to produce goods and services. The markets for these factors of production are similar to the markets for goods and services

More information

Microeconomics Instructor Miller Practice Problems Monopolistic Competition

Microeconomics Instructor Miller Practice Problems Monopolistic Competition Microeconomics Instructor Miller Practice Problems Monopolistic Competition 1. A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product.

More information

Microeconomics Instructor Miller Practice Problems Labor Market

Microeconomics Instructor Miller Practice Problems Labor Market Microeconomics Instructor Miller Practice Problems Labor Market 1. What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded.

More information

Exam 1. Corn (bushels)

Exam 1. Corn (bushels) ECONOMICS 10-008 Dr. John Stewart Feb. 13, 2001 Exam 1 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet using a No.2 pencil. Please note that

More information

THIRD EDITION. ECONOMICS and. MICROECONOMICS Paul Krugman Robin Wells. Chapter 19. Factor Markets and Distribution of Income

THIRD EDITION. ECONOMICS and. MICROECONOMICS Paul Krugman Robin Wells. Chapter 19. Factor Markets and Distribution of Income THIRD EDITION ECONOMICS and MICROECONOMICS Paul Krugman Robin Wells Chapter 19 Factor Markets and Distribution of Income WHAT YOU WILL LEARN IN THIS CHAPTER How factors of production resources like land,

More information

themselves to only a few, and we will explore examples along this continuum.

themselves to only a few, and we will explore examples along this continuum. CHAPTER 6 PERFECT COMPETITION, MONOPOLY AND ECONOMIC VERSUS NORMAL PROFIT CHAPTER OBJECTIVES When you have completed this chapter you will understand the distinction between perfect competition and monopoly,

More information

SHORT-RUN PRODUCTION

SHORT-RUN PRODUCTION TRUE OR FALSE STATEMENTS SHORT-RUN PRODUCTION 1. According to the law of diminishing returns, additional units of the labour input increase the total output at a constantly slower rate. 2. In the short-run

More information

Economics 10: Problem Set 3 (With Answers)

Economics 10: Problem Set 3 (With Answers) Economics 1: Problem Set 3 (With Answers) 1. Assume you own a bookstore that has the following cost and revenue information for last year: - gross revenue from sales $1, - cost of inventory 4, - wages

More information

Name Eco200: Practice Test 1 Covering Chapters 10 through 15

Name Eco200: Practice Test 1 Covering Chapters 10 through 15 Name Eco200: Practice Test 1 Covering Chapters 10 through 15 1. Many observers believe that the levels of pollution in our society are too high. a. If society wishes to reduce overall pollution by a certain

More information

a. What is the total revenue Joe can earn in a year? b. What are the explicit costs Joe incurs while producing ten boats?

a. What is the total revenue Joe can earn in a year? b. What are the explicit costs Joe incurs while producing ten boats? Chapter 13 1. Joe runs a small boat factory. He can make ten boats per year and sell them for 25,000 each. It costs Joe 150,000 for the raw materials (fibreglass, wood, paint, and so on) to build the ten

More information

Market Structure: Perfect Competition and Monopoly

Market Structure: Perfect Competition and Monopoly WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

More information

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

More information

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!!

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications

More information

Test 2 8 November 2006

Test 2 8 November 2006 Eco 301 Name Test 2 8 November 2006 100 points. Please write all answers in ink. You may use pencil and a straight edge to draw graphs. Allocate your time efficiently. 1. A fast-food restaurant currently

More information

Practice Questions Week 6 Day 1

Practice Questions Week 6 Day 1 Practice Questions Week 6 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Economists assume that the goal of the firm is to a. maximize total revenue

More information

OVERVIEW. 7. In perfectly competitive markets, wages are determined by supply and demand.

OVERVIEW. 7. In perfectly competitive markets, wages are determined by supply and demand. 15 DEMAND FOR INPUTS OVERVIEW 1. Each firm is involved in two markets, a market for its output and a market for inputs. Decisions the firm makes in one market affect its decisions in the other market.

More information

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between

More information

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

More information

Microeconomics and mathematics (with answers) 5 Cost, revenue and profit

Microeconomics and mathematics (with answers) 5 Cost, revenue and profit Microeconomics and mathematics (with answers) 5 Cost, revenue and profit Remarks: = uantity Costs TC = Total cost (= AC * ) AC = Average cost (= TC ) MC = Marginal cost [= (TC)'] FC = Fixed cost VC = (Total)

More information

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 14 Elasticity of Supply

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 14 Elasticity of Supply Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture - 14 Elasticity of Supply We will continue our discussion today, on few more concept of

More information

Ch 6- Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

Ch 6- Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question. Class: Date: Ch 6- Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The phrase "decreasing marginal benefit" means that a. the more you consume of the product,

More information

Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015

Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015 Name: Solutions Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015 Spring 2015 Prof. Dowell Instructions: Write the answers clearly and concisely on these sheets

More information

Final Exam (Version 1) Answers

Final Exam (Version 1) Answers Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal

More information

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit 1) Accountants include costs as part of a firm's costs, while economists include costs. A) explicit; no explicit B) implicit;

More information

Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd ) (Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion

More information

N. Gregory Mankiw Principles of Economics. Chapter 13. THE COSTS OF PRODUCTION

N. Gregory Mankiw Principles of Economics. Chapter 13. THE COSTS OF PRODUCTION N. Gregory Mankiw Principles of Economics Chapter 13. THE COSTS OF PRODUCTION Solutions to Problems and Applications 1. a. opportunity cost; b. average total cost; c. fixed cost; d. variable cost; e. total

More information

THE COST OF PRODUCTION

THE COST OF PRODUCTION Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy 2900 (Section ) Chairat Aemkulwat Economics I: Microeconomics Spring 205 Solution to Selected Questions: CHAPTER

More information

chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve

chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve chapter 9 The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole. Perfect Competition and the >> Supply Curve Section 3: The Industry

More information

Essential Graphs for Microeconomics

Essential Graphs for Microeconomics Essential Graphs for Microeconomics Basic Economic Concepts roduction ossibilities Curve Good X A F B C W Concepts: oints on the curve-efficient oints inside the curve-inefficient oints outside the curve-unattainable

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics Fall 2007, Quiz #6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) A monopoly is

More information

Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2

Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2 Factor Markets Problem 1 (APT 93, P2) Two goods, coffee and cream, are complements. Due to a natural disaster in Brazil that drastically reduces the supply of coffee in the world market the price of coffee

More information

Cost of Production : An Example

Cost of Production : An Example University of California, Berkeley Spring 008 ECON 00A Section 0, Cost of Production : An Example What you should get out of this example: Understand the technical derivation of optimal inputs in Cost

More information

chapter Behind the Supply Curve: >> Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost

chapter Behind the Supply Curve: >> Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost chapter 8 Behind the Supply Curve: >> Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost We ve just seen how to derive a firm s total cost curve from its production function.

More information

Summary Chapter 12 Monopoly

Summary Chapter 12 Monopoly Summary Chapter 12 Monopoly Defining Monopoly - A monopoly is a market structure in which a single seller of a product with no close substitutes serves the entire market - One practical measure for deciding

More information

Chapter 7 Monopoly, Oligopoly and Strategy

Chapter 7 Monopoly, Oligopoly and Strategy Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are

More information

FRAMINGHAM STATE COLLEGE PRINCIPLES OF MICROECONOMICS PROBLEM SET NUMBER 13

FRAMINGHAM STATE COLLEGE PRINCIPLES OF MICROECONOMICS PROBLEM SET NUMBER 13 FRAMINGHAM STATE COLLEGE PRINCIPLES OF MICROECONOMICS PROBLEM SET NUMBER 13 My Name is? Using the material covered in CHAPTER 18. 1. On a graph for each of a, b, and c: show the effect of each of the following

More information

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam. , Fall 2007 Version A Special Codes 00000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 201 Final Exam 1. For a profit-maximizing monopolist, a. MR

More information

False_ If there are no fixed costs, then average cost cannot be higher than marginal cost for all output levels.

False_ If there are no fixed costs, then average cost cannot be higher than marginal cost for all output levels. LECTURE 10: SINGLE INPUT COST FUNCTIONS ANSWERS AND SOLUTIONS True/False Questions False_ When a firm is using only one input, the cost function is simply the price of that input times how many units of

More information