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Ch 14 Problems and Applications 1-6:

Ch 14 Problems and Applications 1-6: . #1. What are the characteristics of a competitive market? Many buyers/sellers Each has negligible impact Price taker Identical (same) goods Free entry/exit = access to info./technology

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Ch 14 Problems and Applications 1-6:

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  1. Ch 14 Problems and Applications 1-6: • #1. What are the characteristics of a competitive market? • Many buyers/sellers • Each has negligible impact • Price taker • Identical (same) goods • Free entry/exit • = access to info./technology • Which of the following drinks do you think is best described by these characteristics? Tap water bottled water cola beer Tap water bottled water cola beer ……..why? • Why aren’t the others? Tap water is a natural monopoly Cola and beer have wide variety – so the goods are not all the same

  2. 2. Sold 200 doses and faces following ATC ATC x Q = TC MC 39601 40000 399 40401 401 If a new customer offers to pay her $300 for one dose, should she make one more? Explain Need to know if MC is > or < $300…. So need to know TC ….. Since the MC of making one more dose is $401 and the MR is $300, then she should not make it

  3. 3. Licorice industry is competitive. Each firm produces 2million strings/year. ATC of $0.20 and Price of $0.30 • A. What is the MC of a string? • If profit maximizing where MR = MC • …….since MR = P……..then P=MC….. • So the MC of a string is $0.30 • B. Is this industry in long run equilibrium? Why or Why not? • No … • In LRE, P = MC = ATC and here the P (.30) > ATC (.20)

  4. 0.30 0.20

  5. #4. Order $40 Lobster dinner. You eat ½ of it and are now full. She says “finish it, cant take it home and already paid for it”What should you do? • Once you have ordered it, it is a sunk cost • So now it does not represent an opportunity cost • The cost of your dinner should not influence your decision to eat it or not

  6. #5. Bob’s lawn mowing is profit max. • P = $27 • TC each day = $280 ($30 is fixed) • Q = 10 lawns/day • Short run shut down decision? • TR < VC? • TR = 270 > VC 250 • Or P< AVC ? • P = 27 > AVC = VC/Q 250/10 = 25 • So….don’t shut down

  7. Long Run Exit decision? • TR < TC? • TR = 270 < TC = 280 • Or • P < ATC? • P = 27 < ATC = TC/Q 280/10 = 28 • So……he should exit in long run

  8. #6

  9. a. Calculate profit TR-TC How much should the firm produce to max profit?

  10. B. Calculate MR and MC Graph them

  11. At what Q do these curves cross? How does this relate to answer in A about max profit? Cross between 5, 6 units and this is same as table in A

  12. C. Can you tell whether this firm is in a competitive industry? • Yes it is competitive because MR = P at each Q • are they in long run equilibrium? • No , not in LRE because they have positive economic profits at profit max point MR= MC ($21 at Q 5 and Q6) : • LRE = zero economic profits

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