consumer surplus, producer surplusjjyazar/econ110/midterm2studypacket.pdfconsumer surplus, producer...

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Consumer Surplus, Producer Surplus What is willingness to pay? How does it relate to the demand curve? What is consumer surplus? What does it measure? Write the formula for consumer surplus. Suppose the consumer is willing to pay $20.00 for a particular good but only had to pay $14.00 for it. What is the consumer surplus? If a consumer is willing to pay $15.00 for a particular good but the price of the good is $17.00, then what would be the consumer surplus? Belva is willing to pay $65.00 for a pair of shoes for a formal dance. She finds a pair at her favorite outlet shoe store for $48.00. Calculate Belva’s consumer surplus. Janine would be willing to pay $50 to see Les Misérables, but buys a ticket for only $30. How much does Janine values the performance? Denise values a stainless steel dishwasher for her new house at $500, but buys it for $350. What is Denise’s willingness to pay? Nathan buys a new sound system for his dorm room for $500. He receives consumer surplus of $400 from the purchase. How much does Nathan value his sound system?

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ConsumerSurplus,ProducerSurplusWhatiswillingnesstopay?Howdoesitrelatetothedemandcurve?Whatisconsumersurplus?Whatdoesitmeasure?

Writetheformulaforconsumersurplus.Supposetheconsumeriswillingtopay$20.00foraparticulargoodbutonlyhadtopay$14.00forit.Whatistheconsumersurplus?Ifaconsumeriswillingtopay$15.00foraparticulargoodbutthepriceofthegoodis$17.00,thenwhatwouldbetheconsumersurplus?Belvaiswillingtopay$65.00forapairofshoesforaformaldance.Shefindsapairatherfavoriteoutletshoestorefor$48.00.CalculateBelva’sconsumersurplus. Janinewouldbewillingtopay$50toseeLesMisérables,butbuysaticketforonly$30.HowmuchdoesJaninevaluestheperformance?Denisevaluesastainlesssteeldishwasherforhernewhouseat$500,butbuysitfor$350.WhatisDenise’swillingnesstopay? Nathanbuysanewsoundsystemforhisdormroomfor$500.Hereceivesconsumersurplusof$400fromthepurchase.HowmuchdoesNathanvaluehissoundsystem?

BUYER

WILLINGNESSTOPAY

MIKE

$50.00

SANDY

$30.00

JONATHAN

$20.00

HALEY

$10.00

Ifthetablerepresentsthewillingnesstopayof4buyersandthepriceoftheproductis$15,thenwhowouldbewillingtopurchasetheproduct?Onagraph,describehowtofindtheconsumersurplusarea.Accordingtothegraphshown,whenthepriceisP1consumersurplusisgivenbywhicharea? Accordingtothegraphshown,atthepriceofP2,consumersurplusisgivenbywhicharea?Whatdopointsalongthesupplycurverepresent?Whatistheformulaforproducersurplus? Onagraph,describehowtofindtheproducersurplusarea.Rogerproducescomputerboards.Hisproductioncostis$10perboard.Hesellstheboardsfor$25each.Whatishisproducersurplus?

Accordingtothegraphshown,attheequilibriumprice,whatistheconsumersurplus? Accordingtothegraphshown,attheequilibriumprice,whatistheproducersurplus?Accordingtothegraphshown,attheequilibriumprice,whatisthetotalsurplus?ThereareonlyfiveconsumersinterestedinHangover3Blueraydiscs.ThemaximumwillingnesstopayoftheseconsumersforHangover3Blueraydiscaregivenbelow:

Emily $10Carter $14Angela $16Greyson $19Jack $20

a) DrawthemarketdemandcurveforHangover3blueraydisc.

b)SupposethepriceofHangover3blueraydiscis$15.Howmanyunitswouldbesold?Howmuchwouldbetheconsumersurplus?c)SupposethepriceofHangover3blueraydiscis$14.Howmanyunitswouldbesold?Howmuchwouldbetheconsumersurplus?

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Supposethedemandandsupplycurvesfortomatoesaregivenbelow.

Calculatetheconsumersurplus,producersurplusandtotalsurplusunderfreemarketequilibrium.PriceControlsGovernmentssometimesinterveneinmarketsusingpricecontrolsiftheequilibriumpriceistoohighforconsumersortoolowforproducers.Whatisapriceceiling?Assumethegraphontherightrepresentthemarketforburritos.Supposethegovernmentimposesapriceceilinginthismarketatapriceof$5.00,whatwouldbetheresult?Whatkindofpricecontrolisrentcontrolanexampleof?Listtheconsequencesofrentcontrols.

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Supposethefollowingtablerepresentsthedemandandthesupplyofbicycles.Whathappensifgovernmentimposesapriceceilingof$100perbicycle?Price Quantitydemanded Quantitysupplied$160 20 80$120 40 40$100 50 20$80 60 0Supposethefiguresshownbelowrepresentthemarketfor3Dprinters.Ononeofthemarketsaneffectivepriceceilingisimposed.Theothermarkethasanineffectivepriceceiling.Identifywhichoneiswhich.(Note:effectivepriceceilingisabindingpriceceilingthatwouldaltertheinitialmarketequilibrium.Ineffectivepriceceilingisnotabindingonewhichwouldnothaveanyeffectontheinitialmarketequilibrium)

Inwhichpanel(s)inthefigureshownabove,wouldtherebeashortagefor3Dprintersattheceilingprice?Whatisapricefloor?Whatkindofpricecontrolisminimumwageanexampleof?Supposethegraphshowsthemarketforunskilledlabor.Ifthegovernmentimposesaminimumwageof$14.00inthismarket,whatwouldbetheresult?

ExplicitandImplicitCosts,AccountingandEconomicProfitWhatdoweassumeineconomicsthattheaimofthefirmsis?Howisprofitcalculated?Howistotalrevenuecalculated?Whatisthedifferencebetweenaccountingprofitandeconomicprofit?Whatisexplicitcost?Giveexamplesofexplicitcosts.Whatisimplicitcost?Giveexamplesofimplicitcosts.Wolfgangcurrentlyworksforalawfirmforayearlysalaryof$125,000.Heisconsideringquittinghisjobandopeninghisownlawpractice,whereheexpectstobring$200,000revenueperyear.Tostarthisownfirm,hewouldneedanofficespaceandalawclerk.Theofficespacehefoundrentsfor$50,000peryear.Alawclerkcouldbehiredfor$35,000peryear.ListWolfgang’sexplicitcosts.Howmuchishisexplicitcosts?CalculateWolfgang’saccountingprofit.ListWolfgang’simplicitcosts.Howmuchishisimplicitcosts?ShouldWolfgangopenhisownlawpractice?Toanswerthisquestion,whatelsewouldyouwanttoknow?ThenegativeeconomicprofitwouldmeanthatWolfgangwouldbeearning$10,000lessthanifheworkedforthecorporatefirm.Sohewouldbebetteroffstayingatthiscurrentjob.Supposeyouhavesecuredyourselfasummerjob,cuttinggrass.Youcharge$40perlawnandyoumow400lawnsoverthesummerbreak.Youspend$1,000onequipmentand$2,000ongasoline.YoucouldhaveworkedatMcDonaldsandearned$8,000overthesummer.Calculateyouraccountingprofitandeconomicprofit.WhichoptionisbetterforyoutoworkatMcDonaldsortocutgrass?

Nexttoeachstatement,writeTfortrueorFforfalse.__________1.TotalRevenue=PricexQuantity__________2.Thedifferencebetweenaccountingprofitandeconomicprofitisimplicitcosts.__________3.Economicprofitisusuallybiggerthanaccountingprofit.KeyTermsMatcheachtermwithitsdefinition.

A.AccountingProfit________Incomefromsellingafirm’sproduct;definedaspricetimesquantitysoldB.EconomicProfit________TotalrevenueminusexplicitcostsC.ExplicitCosts________Totalrevenueminus(explicitplusimplicitcosts)D.ImplicitCosts________TheprocessofcombininginputstoproduceoutputE.Production_______Anorganizationthatcombinesinputs(labor,capital,land,rawmaterials)toproduceoutputF.Revenue________OpportunitycostofresourcesalreadyownedbythefirmandusedinbusinessG.Profit________Outofpocketcostsforafirm;suchaspaymentsforwages,rent,etc.H.Firm________Thedifferencebetweenrevenueandcost,calculatesasRevenueminuscost

ProductionintheShortRunWhatarefixedinputs?Whatarevariableinputs?Howdowedefineshortrunineconomics?Howdowedefinelongrunineconomics?Supposeyouhaveapizzarestaurant.Yourrestaurantisbecomingpopularandyouneedto

increaseyourproduction.Intheshortrunwhichofyourinputswouldbefixedandwhichwouldbevariable?Definemarginalproduct.Definethelawofdiminishingmarginalproduct.Youhaveasmallbusinesswherelumberjackscuttreeswithatwoperson-saw.Yourproduction

dataisgiveninthetablebelow.Fillinthemarginalproductcolumn.

No.oflumberjacks

No.oftreescut MarginalproductMP

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Atwhichworkerdiminishingmarginalproductivitysetin?

Supposeyouhaveasmallstandwhereyousellsnowcones.Thefollowingtableshowsthenumberofworkersandtheresultingsnowconeoutputthattheyproduce.Numberofworkers(L)

Totaloutput(Q)

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a) CalculateMPandAPoflaborandfillinthetable.b) Whendoesdiminishingmarginalproductivitybegin?

Yournewaccountantaccidentlylostsomeofyourdata.Luckilyusingtherelationshipbetweentotalproduct,averageproductandmarginalproductyouareabletofillinthebelowtable.Labor(L) TotalProduct

(Q)AverageProduct(APL)

MarginalProduct(MPL)

0 0 0 -1 19 2 36 3 4 256 64 1035 375 6 1297 637 91 1338 96 Nexttoeachstatement,writeTfortrueorFforfalse.__________1.Marginalproductistheadditionaloutputofonemoreworker.__________2.Laboristypicallyafixedinput.__________3.Marginalproductcanneverbenegative.KeyTermsMatcheachtermwithitsdefinition.

A.Diminishing________FactorsofproductionthatafirmcaneasilyincreaseordecreaseinmarginalproductivityashortperiodoftimeB.Fixedinputs________Asfirmemploysmorelabor,capitalbeingfixed,additionaloutputproducedeventuallydeclinesC.Marginalproduct________Synonymforfirm’soutputD.Shortrun________ResourcesfirmsusetoproducetheirproductsE.Totalproduct________Periodoftimeduringwhichatleastoneormoreofthefirm’sinputsisfixedF.Variableinputs________Changeinfirm’soutputwhenitemploysonemoreworkerG.Factorsofproduction________Periodoftimeduringwhichallofthefirm’sinputsarevariableH.Longrun________Factorsofproductionthatcan’teasilybeincreasedordecreasedinashortperiodoftime

CostsintheShortRunDefinefixedcosts.Definevariablecosts.Definetotalcosts.Supposeyouownalawncarebusinesswhereyouprovidemowingservices.Yourfixeinputis

twolawnmowersthatyourented.Therentforeachlawnmoweris$80permonth.Yourvariableinputisworkersyouhire.Yourtotalcostisprovidedinthetablebelow.Fillinthemissingentries.

Quantity FixedCost(FC) VariableCost(VC) TotalCost(TC)0 $160 10 $160 $20018 $160 $25023 $160 $32029 $160 $40035 $160 $49040 $160 $500Writetheformulasforaveragetotalcost(ATC),averagevariablecost(AVC),averagefixedcost(AFC)andmarginalcost(MC).Pleaserefertothelawncarebusinessproblemgivenabove.Usingthetableyoufilledpleaseanswerthefollowingquestions:Whatistheaveragevariablecostofproducing18lawnservices?Whatistheaveragefixedcostofproducing35lawnservices?Whatistheaveragetotalcostofproducing40lawnservices?DescribetherelationshipbetweenMCandATC.(thesamerelationshipappliestoMCandAVC)WhenMCishigherthanATC,ATCrises.WhenMCislowerthanATC,ATCdecreases.SupposeyouareoperatingabicyclemessengerservicefordowntownColumbus.Thenumberofemployeesandthecorrespondingnumberofparcelsthattheycandeliverinamonthisgivenbythefirsttwocolumnsofthebelowtable.Youleased5bicycleswitha$500leaseoneachthatincludestheliabilityinsurance.Youarealsopaying$3,000permonthtorenttheofficespaceand$500forwebsitehostingandphoneservice.Youpay$800monthlysalarytoeveryworkeryouemploy.Giventhisinformation,fillinthetablebelow.

Numberofworkers(L)

Totaloutput(Q)

FixedCosts VariableCosts TotalCost

0 0 1 30 2 65 3 100 4 130 5 150 6 160 7 165 Choosethecorrectanswerforthefollowingmultiple-choicequestions:SupposeJanisstartingupasmallcoffeecartbusinessinfrontofCornsbuilding.VariablecostsforJan’scoffeecartbusinesswouldincludethecostofwhichofthefollowing: a. costofbuildingthecart b. costofhiringagraphicdesignertodesignherbannerforherbusiness c. costofgroundcoffee d. costoftheespressomachinesheleasedforonesemestere. AlloftheaboveIfafirmproducesnothing,whichofthefollowingcostswillbezero? a. totalcost b. fixedcost c. opportunitycost d. variablecostAveragetotalcostisequalto a. output/totalcost. b. totalcost–totalquantityofoutput. c. averagevariablecost+totalfixedcost. d. totalcost/output.Thecostofproducinganadditionalunitofoutputisthefirm’s a. marginalcost. b. productivityoffset. c. variablecost. d. averagevariablecost.Marginalcosttellsusthe a. valueofallresourcesusedinaproductionprocess. b. marginalincrementtoprofitabilitywhenpriceisconstant. c. amountbywhichtotalcostriseswhenoutputisincreasedbyoneunit. d. amountbywhichoutputriseswhenlaborisincreasedbyoneunit.Diminishingmarginalproductsuggeststhatthemarginal a. costofanextraworkerisunchanged. b. costofanextraworkerislessthanthepreviousworker’smarginalcost. c. productofanextraworkerislessthanthepreviousworker’smarginalproduct. d. productofanextraworkerisgreaterthanthepreviousworker’smarginalproduct.

Theaveragefixedcostcurve a. alwaysdeclineswithincreasedlevelsofoutput. b. alwaysriseswithincreasedlevelsofoutput. c. declinesaslongasitisabovemarginalcost. d. declinesaslongasitisbelowmarginalcost.Whenmarginalcostislessthanaveragetotalcost, a. marginalcostmustbefalling. b. averagevariablecostmustbefalling. c. averagetotalcostisfalling. d. averagetotalcostisrising.Whenmarginalcostexceedsaveragetotalcost, a. averagefixedcostmustberising. b. averagetotalcostmustberising. c. averagetotalcostmustbefalling. d. marginalcostmustbefalling.Thecurvesbelowreflectinformationaboutthecoststructureofafirmwhichproducescellphones.Usethefiguretoanswerquestionsbelow.

Writetheletterofthecurvethatismostlikelytorepresentaveragetotalcost:____________ Writetheletterofthecurvethatismostlikelytorepresentaveragefixedcost:____________ Writetheletterofthecurvethatismostlikelytorepresentaveragevariablecost:____________Writetheletterofthecurvethatismostlikelytorepresentmarginalcost:____________ Foralargefirmthatproducesandsellsautomobiles,whichofthefollowingcostswouldbeavariablecost? a. the$20millionpaymentthatthefirmpayseachyearforaccountingservices b. thecostofthesteelthatisusedinproducingautomobiles c. therentthatthefirmpaysforofficespaceinasuburbofSt.Louis d. Alloftheabovearecorrect.

Staplers–R-Usproducesandsellsstaplers.Lastyear,itproduced5,000staplersandsoldeachstaplerfor$8.Inproducingthe5,000staplers,itincurredvariablecostsof$30,000andatotalcostof$45,000.Howmuchisthefirm’sfixedcosts? Inproducingthe5,000staplers,whatwasthefirm’saveragefixedcost?Inproducingthe5,000staplers,whatwasthefirm’saveragevariablecost? Inproducingthe5,000staplers,whatwasthefirm’saveragetotalcost? Whatwashefirm’seconomicprofitfortheyear? Harry'sHotdogsisasmallstreetvendorbusinessownedbyHarryHuggins.IfHarrymakes15hotdogsinhisfirsthourofbusinessandincursatotalcostof$16.50,whatishisaveragetotalcostperhotdog?Yoursmallpizzashop,BishopsPizzahasthefollowingcosts.Totaloutput

TC FC VC AFC AVC ATC MC

0 $100 10 $120 20 $140 30 $170 40 $200 50 $260 60 $360 Fillinthebelowtablebycalculatingfixedcosts,variablecosts.averagefixedcosts,averagevariablecosts,averagetotalcostsandmarginalcosts.

Fillintheblanks.Totalcostdividedbythequantityofoutputisthe______________________________________.TheaveragetotalcostisusuallyaUshapedcurvethatstartsrelatively__________________duetohigh_________________costsatlowlevelsofoutput,fallstoaminimumasoutputincreases,andthenrisesagaindueto_____________________________________.DrawyourownsketchoftheATC,AVCandMCcurves.PayattentiontotheshapesofthecurvesandthepointofintersectionbetweentheMC,AVCandATC.Alsodon’tforgettofactorinaveragefixedcostforthedistancebetweenyourAVCandATCasoutputrises.KeyTermsMatcheachtermwithitsdefinition.

A.Averagetotalcost________Costofproductionthatincreaseswiththequantityproduced;thecostofvariableinputsB.Averagevariablecost________TotalcostdividedbythequantityofoutputC.Fixedcost________ThesumoffixedandvariablecostsofproductionD.Marginalcost________VariablecostdividedbythequantityofoutputE.Totalcost________Costofthefixedinputs;expenditurethatafirmmustmakebeforeproductionstartsanddoesnotchangeregardlessoftheproductionlevelF.Variablecost________TheadditionalcostofproducingonemoreunitG.Averagefixedcost________Fixedcostdividedbythequantityofoutput

Nexttoeachstatement,writeTfortrueorFforfalse.__________1.Marginalcostwillalwaysbegreaterthanaveragevariablecost.__________2.Sunkcostsshouldbeconsideredwhenmakingeconomicdecisionsaboutfutureproduction.__________3.WhenMCishigherthanATC,ATCrises.

CostsintheLongRunWhatareeconomiesofscale?Whatarediseconomiesofscale?Howdoweobtainthelongrunaveragecostcurvefromtheshortrunaveragecostcurves?Sketchagraphofafirm’slongrunaveragecostcurveshowingeconomiesofscale,constantreturnstoscaleanddiseconomiesofscale.Labelyouraxesandthethreescaleareasonyourgraph.Thefigurebelowdepictsaveragetotalcostfunctionsforafirmthatproducesautomobiles.

Whichofthecurvesismostlikelytocharacterizetheshort-runaveragetotalcostcurveofthesmallestfactory?________________ Whichcurverepresentsthelong-runaveragetotalcost?________________Writethenameoftheaveragetotalcostcurvesthatthefirmcanoperateoninthelongrun________________Whatoutputlevelsdoesthisfirmexperiencediseconomiesofscale?AtlevelsofoutputbelowMwhattypeofreturnstoscaledoesthefirmexperience?

KeyTermsMatcheachtermwithitsdefinition.

A.Constantreturns________ThelongrunaveragecostofproducingoutputdecreasesastotaloutputtoscaleincreasesB.EconomiesofScale________Theaveragetotalcostcurveintheshortterm;showsthetotaloftheaveragefixedcostsandaveragevariablecostsC.DiseconomiesofScale________Showsthelowestpossibleaveragecostofproduction,allowingalltheinputstoproductiontovarysothatthefirmischoosingallinputsoptimallyD.Longrunaverage________Thelongrunaveragecostofproducingoutputincreasesastotaloutputcostcurve(LRAC)increasesE.Shortrunaverage________Expandingoutputdoesnotchangethelongrunaveragecostofproductioncostcurve

ExercisesonPerfectCompetitionWhenafirmhasnoabilitytoinfluencemarketpricesitissaidtobeinwhatkindofamarket?

Inacompetitivemarket,howwilltheactionsofanysinglebuyerorsellerimpactthemarketprice?Listanddescribethecharacteristicsofaperfectlycompetitivemarket.

Whywouldafirminaperfectlycompetitivemarketalwayschoosetosetitspriceequaltothecurrentmarketprice?Ifafirmsetitspricebelowthecurrentmarketprice,whateffectwouldthishaveonthemarket?

MangeroffirmX,reportsthathefacesthefollowingpriceandquantityrelationshipforhisproduct:Quantity(q)Price(P) 1 13 2 13 3 13 4 13 5 13 6 13 7 13 8 13 9 13 a)Thepriceandquantityrelationshipinthetableaboveismostlikelythatfacedbyafirmin

whattypeofmarketstructure?b)Overwhichrangeofoutputismarginalrevenueequaltoprice? c)Overwhatrangeofoutputismarginalrevenuedeclining? d)Forafirm,likefirmXinaperfectlycompetitivemarket,whattypeofrelationshipisthere

betweenthepriceofthegoodandmarginalrevenue?e)ManageroffirmXisdebatingwhetherheshoulddecreasehispricebelow$13tosellmore

units.Pleaseadvise.f)InclasswesaidthatthefirmslikefirmXinperfectcompetitionarepricetakers,itimpliesthat

iffirmXraisesitsprice,whatwillhappen?

g)IffirmXinacompetitivemarketreportstohavezeroeconomicprofit,whatcanyouinfer

aboutitsaccountingprofit?

Whenafirminacompetitivemarketproduces10unitsofoutput,ithasamarginalrevenueof$8.Whatwouldbethefirm’sprice?Choosethecorrectanswerforthefollowingmultiple-choicequestions:Inacompetitivemarket, a. eachsellercansellallhewantstosellatthegoingprice. b. buyersandsellersarepricetakers. c. thegoodsofferedbythedifferentsellersarelargelythesame. d. Alloftheabovearecorrect.Forafirminaperfectlycompetitivemarket,thepriceofthegoodisalways a. equaltomarginalrevenue. b. equaltototalrevenue. c. greaterthanaveragerevenue. d. Alloftheabovearecorrect.WhichofthefollowingisNOTacharacteristicofaperfectlycompetitivemarket? a. Firmsarepricetakers. b. Firmshavedifficultyenteringthemarket. c. Therearemanysellersinthemarket. d. Goodsofferedforsalearelargelythesame.Whichofthefollowingstatementsbestreflectsaprice-takingfirm? a. Ifthefirmweretochargemorethanthegoingprice,itwouldsellnoneofitsgoods. b. Thefirmhasnoincentivetochargelessthanthegoingprice. c. Thefirmcansellasmuchasitwantstosellatthegoingprice. d. Alloftheabovearecorrect.Youaregiventhefollowingdataforafirmoperatinginacompetitivemarket.FillintheremainingcolumnsforMRandMC. QuantityTotalRevenueTotalCostMarginalRevenueMarginalCost 0 $0 $10 1 9 14 2 18 19 3 27 25 4 36 32 5 45 40 6 54 49 7 63 59 8 72 70Ataproductionlevelof4unitswhatistherelationshipbetweenTRandVC?

Atwhichquantityofoutputismarginalrevenueequaltomarginalcost? Whatistheformulatocalculatetotalprofitforafirm?Canyouexpressthetotalprofitformulaintermsofperunitprofit?Whatistheruleforprofitmaximization?

TheWheelerWheatFarm,whichoperatesinacompetitivemarket,sellswheattoagrainbrokerinSeattle,Washington.TheWheelerWheatFarmreportsthefollowingdata: Quantity(q)TotalRevenue TotalCost 0 $0 $10 1 9 14 2 18 19 3 27 25 4 36 32 5 45 40 6 54 49 7 63 59 8 72 70 9 81 82 Atwhichquantityofoutputismarginalrevenueequaltomarginalcost?

Supposeinthewheatindustry,achangeindemandresultsthewheatpricestoriseto$11.Whatshouldthewheatfarmdotomaximizeitsprofit?Supposeadecreaseindemandcausedwheatpricestodropto$5intheindustry.Whatshouldthewheatfarmdotomaximizeitsprofit?Wheelerfarm’smanagertellsyouthatthetotalrevenueislessthanvariablecostsattheirprofit

maximizingoutput.Whatwouldyouadvise?TheRoadrunnerfarm,Wheeler’soneofcompetitors,reportsthatattheirprofitmaximizing

output,thepriceisbelowaveragevariablecost.Whatwouldyouadvise? Whenwouldaprofit-maximizingfirmshutdownintheshortrun?(Writeyourexpressionintermsofoneunitofoutput)Whenwouldaprofit-maximizingfirmshutdownintheshortrun?(Writeyourexpressionintermsofqunitsofoutput)Inthelongrunallofafirm’scostsarevariable.Inthiscase,whatistheexitcriterionforaprofit-

maximizingfirm?Whenprofit-maximizingfirmsincompetitivemarketsareearningprofits,inthelongrunwhatwouldhappen?

Youwitnessednewfirmsenteringacompetitivemarket.Whatcanyouinferfortheexistingfirmsinthatmarket?Indoorknobmanufacturingindustry,youobservedthatthefirmsaremakinglosses.Inthelong

runwhatwouldhappen?Youobservedthatinthelongrun,aprofit-maximizingfirmchosetoexitamarket.Whatcanyou

inferabouttheprofitsofthisfirm?Whatsignalsthefirmstoenterorexitamarketinacompetitiveindustry?Youobservedthatfirmsareneitherenteringnorexitingthecompetitiveindustrywhere

soybeansareproduced.Listallthatyoucaninferaboutexistingfirmsdatafromthisobservation.Afirminacompetitivemarkethasthefollowingcoststructure: Output TotalCost 0 $5 1 $10 2 $12 3 $15 4 $24 5 $40 Ifthemarketpriceis$3,whatwillthisfirmdointheshortrun?Ifthemarketpriceis$3,whatwillthisfirmdointhelongrun?Ifthemarketpriceis$9,whatwillthisfirmdointheshortrun?

Ineachofthediagramsbelowthefigureontherightrepresentstheperfectlycompetitivemilkindustry.Theoneontheleftrepresentsanindividualmilkproducerinthismarket.Inalldiagramstheverticalaxisismeasuredindollars,andthehorizontalaxisrepresentsoutput.ThediagramsarelabeledA,BandC.Matchtheletterofthegraphtothecorrectscenariogivenbelow.

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individualfirmsaremakingnegativeeconomicprofit.Theindustrysupplywillincreaseandnewfirmswillentertheindustryindiagram________since

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‘Squeaky-Clean’isacarwashcompanyoperatinginaperfectlycompetitivemarketintheshortrun.Thetotalcostofprovidingcarwashserviceforvariousoutputlevelsisgivenbelow.Moreover,theSqueaky-Clean’sfixedcosts(FC)aregivenas$30.Output(Q) TotalCost(TC)

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‘Squeaky-Clean’intheshortrun?Whatisthetotalprofitofthisfirm?TheshortRunCostCurvesforafirmoperatinginaperfectlycompetitivemarketaregivenbelow.

Ifthemarketpriceis$7intheperfectlycompetitiveindustry,intheshortrunhowmanyunits

willthisfirmproduce?Howmuchprofitwillitmake?Giveanexampleofapricewherethisfirmmakespositiveeconomicprofit?Giveanexampleofapricewherethisfirmmakesnegativeeconomicprofit?CanyoucalculatetheFCoftheabovefirmfromthecostcurvesdrawnabove?Describethechangesthatwouldtakeplaceinthelongruninacompetitivemarketwherefirms

areearningeconomicprofitsintheshortrun.

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TheresidentialguttercleaningindustrycomprisesofmanyidenticalfirmsofferingthesameserviceinColumbus.Thediagramontherightrepresentstheperfectlycompetitiveguttercleaningindustry.Thelongruncostsof“WeGutGutters”,arepresentativefirmintheindustry,areshownintheleft-handpanel.

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Giventhedataabove,whatisthecurrentmarketpriceforguttercleaning?Giventhecurrentmarketprice,determinehowmanyguttercleaningserviceswill“WeGut

Gutters”provideintheshortrunifitwantstomaximizeprofit?Atthecurrentmarketpricewhatisthetotalindustryoutput?

Istheguttercleaningindustrycurrentlyinlongrunequilibrium?Ifnot,willthefirmsenterorexittheindustry?Whatwillbetheequilibriumpriceofaguttercleaningserviceinthelongrun?Inthelongrun,howmanyguttercleaningserviceswill“WeGutGutters”provide?