Final Exam Review Microeconomics

1. Final Exam ReviewMicroeconomics Econ EB122 WIN 2012 Inst. Shan A . Garib Mohawk College

2. Final Exam Microeconomics Date: Monday April 5th, 2013 Time: 12:30pm – 2:00pm In-Class Review ALL Quizzes given in class

3. Ch 9. A Perfectly Competitive Firm • Example: Say we have a price = MR = D of $311, $662, $1163 • Output (Q) AVC ATCTC(=ATC*Q) MC MR 1 MR 2 MR 3 • 1 40 100 100*1=100 31 66 116 • 2 35 80 80*2=160 30 31 66 116 • 3 40 72 72*3=216 65 31 66 116 • 4 75 80 85*4=340 115 31 66 116 • PC Max profit at P,MR=MC • Therefore, • Remember TC= TFC+TVC • @MR$31>=MC$30 and Q=2, Rev=2*31=$62, ∏=$62-$160= -$98, MR < AVC < ATC (shut down LR) • @MR$66>=MC$65 and Q=3, Rev=3*66=$198, ∏=$198-$216=-$18, AVC < MR < ATC (shut down SR) • @MR$116≈MC$115 and Q=4, Rev=4*116=$464, ∏=$464-$340, AVC < ATC < MR (stay in business) • Rules: MR >= MC

4. Minimizing Losses in the SR • Calculating the SR Breakeven Price • At what point do you shut down? the BE Price where MR = Lowest ATC pt. B and TR = TC • pt. B there are no econ profits Min ATC = 80 • pt C is SR shut down price Min AVC = 35 • So if P,D,MR 1 = 66 then it is between Min ATC (B) and Min AVC (C) Firms shut down in SR MC Perfectly Competitive P ATC B AVC MR, Pc, D1 = 80 MR, Pc, D1 = 35 C

5. Minimizing Losses in the SR • At what point do you shut down? the BE Price where MR = Lowest ATC pt. B and TR = TC • pt. B there are no econ profits Min ATC = 72 • pt C is SR shut down price Min AVC = 67 • So if P,D,MR2 = 31 then it is below Min ATC (B) and Min AVC (C) Firms shut down in LR MC Perfectly Competitive P ATC B AVC MR, Pc, D1 , = 72 MR, Pc, D1, = 67 C

6. Minimizing Losses in the SR • Calculating the SR Breakeven Price • At what point do you shut down? the BE Price where MR = Lowest ATC pt. B and TR = TC • pt. B there are no econ profits Min ATC = 85 • pt C is SR shut down price Min AVC = 75 • So if P,D,MR 3 = 116 then it is greater than Min ATC (B) and Min AVC (C) Firms stay in business MC Perfectly Competitive P ATC B AVC MR = Pc = D1 = 85 MR = Pc = D1 = 75 C

7. A Perfectly Competitive Industry • Example: Say we have a price/unit of $611, $662, $1163 • We have an industry of 100 firms: • Output (Q) AVC ATCTC(=ATC*Q) MC MR 1 MR 2 MR 3 • 1 40 100 100*1=100 31 66 116 • 2 35 80 80*2=160 30 31 66 116 • 3 40 72 72*3=216 65 31 66 116 • 4 75 80 85*4=340 115 31 66 116 Therefore, • @firm1 price $31, Q = 2, industry Q =200 • @firm2 price $66, Q = 3, industry Q =300 • @firm3 price $116, Q = 4, industry Q =400 • For an Industry equilibrium of (P, Q*100) = ($116,400) • ∏ = Rev – Total Cost • = 400*$116 – (34000) • = 46400 – 34000 • = 12400

8. MC ATC1 ATC3 ATC2 A PM B CM Profit D MR QM Ch 10. A Monopolist Making a Profit Price LOSS C 0 Quantity

9. MC ATC2 ATC1 PM D MR QM A Monopolist Breaking Even Price CM = 0 Quantity

10. MC ATC Loss B CM A PM D MR QM A Monopolist Making a Loss Price 0 Quantity

11. D MR Monopolist Price and Quantity Effects Single Monoply Firm Industry (10 firms) P P S = MC Di Si = SUM of MC 10 firms in industry Pm PPC=MRPC DPC = MCM AMon 1.1 21 2.1 Q Q

12. Monopoly and Allocative Efficiency • Compared to the PC firm, the monopolist produces less (1.1) and charges more (PM) See point “A” where, for the Monopolist MR=MC • At point “B” the PC firm maxes profit where MR=MC for the PC firm. So QPC= 2.1 and price = PPC

13. Monopoly and Allocative Efficiency • At point “B” the PC firm maxes profit where MR=MC • Remember, for a PC firm MR=P so, the firm maxes profit at P=MC • If MR > MC then the PC firm will increase production until MR(=P)=MC • The PC ALWAYS produces at the SOCIALLY OPTIMAL point! ALLOCATIVE EFFICIENT • But, the monopolist produces at P > MC

14. Monopoly and Allocative Efficiency • But, the monopolist produces at P > MC see point “A” • Compared to the PC firm, QMON < QPC • THE MONOPOLIST FIRM DOES NOT PRODUCE (Q) AT THE SOCIALLY OPTIMAL POINT!! • This is an example of: Allocative INEFFICIENCY

15. Monopoly and Productive Efficiency • The PC firm has to, in the long run, produce at MIN ATC to stay in business. • This is the point at which the competiton has driven the price down (undercut each other) until price sold = price to produce ie If, Profit = TRev > TCost Then, in a PC market ZERO Profit = TR = TC what is produced is what society WANTS! Productive Efficiency The Monopolist doesn’t have to worry about productive efficiency because there is no competition! It can set price ABOVE MC where Profit = TRev > TCost ALWAYS

16. 10.5 Regulation of a Monopoly • A Natural Monopoly is a firm that first takes advantage of economies of scale (big size) which allow it to operate at low costs • It’s MC is pretty much constant ie. horizontal to x-axis ie. perfectly elastic • Let’s see how this looks... Pm

17. D D = P MR MR Monopolist Price and Quantity Effects Regulation of a Single Monoply Firm Single Monoply Firm P P MC MC A C Pm PAC ATC B PREG MCM MCM A QM QREG QM Q Q QAC

18. The Regulation of a Monopoly • It’s MC is pretty much constant ie. horizontal to x-axis ie. perfectly elastic but still produces at point “A” where: MC=MR and production = QM Not productively or allocatively efficient • Through regulation, the government can force the monopolist to produce at the socially optimal point, “B” where: P = MC and production = QREG

19. The Regulation of a Monopoly • Through regulation, the government will force the monopolist to produce at the socially optimal point, “B” where: P = MC and production = QREG Productively and allocatively efficient • BUT, the government can’t force the monopolist to produce at point “B” because at this point in the long run the firm would have to shut down. • They allow a FAIR RETURN to exist at point “C” through Average Cost Pricing • Not productively or allocatively efficient

20. D D,P MR MR Short Run and Long Run in Monopolistic Competition Single Monoply Firm Single Monopolistically Competitive Firm Long Run Profit P P MC MC B Pm P = ATC ATCM A ATC ATC QM QM Q Q

21. 11.2 Short-Run, Output, Price, and Profit of a Monopolistic Competitor • Like a monopoly, • The monopolistic competitive firm has some monopoly power so the firm faces a downward sloping demand curve • Marginal revenue is below price • At profit maximizing output, marginal cost will be less than price see point “A” • Like a perfect competitor, zero economic profits exist in the long run see point “B”DEMAND MOVES DOWN to P=ATC and profit=ZERO. As profits are made more firms move in the market and demand for the original firm’s product goes down.

22. Monopolistic Competition Compared with Perfect Competition Graph P MC • In monopolistic competition in the long run, P > min ATC, • In perfect competition in the long run, P = min ATC ATC PMC DPC Outcome: Monopolistic competition output is lower and price is higher than perfect competition PPC DMC MRMC Q QMC QPC

23. Monopolistic Competition Compared with Perfect Competition Graph P MC • In monopolistic competition in the long run, P > min ATC, ATC PMC DPC Outcome: Monopolistic competition output is lower (excess capacity) and price is higher than perfect competition PPC DMC MRMC Q QMC QPC

24. Monopolistic Competition Compared with Perfect Competition Graph P MC • So, if (MIN) ATC= 3 =P and lets say Q= 4 then TC= 3*4=12 and • If, for example, price = 3 at Q=4 then, TR is 4*3=12 and profit=12-12=0 ATC PMC DPC PPC Outcome: Monopolistic competition output is lower (excess capacity) and price is higher than perfect competition DMC MRMC Q QMC QPC

25. Perfect Competition: when are Profits Maxed? • At pt. A: MC(A) < MR(B) so can produce more to get more profit • Continue to produce until pt. C where P,MR=MC • Profit is box: GCEF Profit P MC ATC B C MR, P, D G E F A Q