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Exercises

Exercises. Econ 304 Chapter 13. Do you know …. how to calculate different types of profits? how to calculate and graph different revenue curves? how to calculate and graph different product curves? how to calculate and graph different cost curves?

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Exercises

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  1. CRC Economics

  2. Exercises Econ 304 Chapter 13 CRC Economics

  3. Do you know … • how to calculate different types of profits? • how to calculate and graph different revenue curves? • how to calculate and graph different product curves? • how to calculate and graph different cost curves? • how to calculate the profit-maximizing output level? CRC Economics

  4. 1. How to calculate profits? • Given the information below about a firm: • Answer the questions that follow. CRC Economics

  5. Questions to answer How much is total revenue (TR)? Formula: TR = P x Q TR = $25,000 x 10 = $250,000 CRC Economics

  6. Questions to answer How much are explicit costs? Hint: Explicit costs = costs that require money outlay Explicit costs = Costs of raw materials + Interest costs of borrowed money Explicit costs = $150,000 + ($300,000x10%) = $180,000 CRC Economics

  7. Questions to answer How much are implicit (opportunity) costs? Hint: Implicit costs = costs that do NOT require money outlay Implicit costs = Foregone salary + + Foregone interests on own money Implicit costs = $70,000 + ($100,000x10%) = $80,000 CRC Economics

  8. Questions to answer How much are total costs (TC)? Formula: Total costs = Explicit costs + Implicit costs TC = $180,000 + $80,000 = $260,000 CRC Economics

  9. Questions to answer How much is accounting profit? Formula: Accounting profit = Total revenue – Explicit costs Accounting profit = $250,000 - $180,000 = $70,000 CRC Economics

  10. Questions to answer How much is economic profit (P)? Formula: Economic profit = Total revenue – Total costs Economic profit = P = $250,000 - $260,000 = -$10,000 CRC Economics

  11. Questions to answer Is the business profitable? Why or why not? Hint: Profitable  P > 0 The business is NOT profitable, because economic profit = P = -$10,000 < 0. CRC Economics

  12. 2. How to calculate and graph different revenue curves? • Calculating the revenues of a firm in perfect competition (i.e. a perfectly competitive firm). • Graph the corresponding revenue curves. • Calculating the revenues of a firm in imperfect/no competition. • Graph the corresponding revenue curves. CRC Economics

  13. a. Perfect competition • Given the information below about a firm in perfect competition: • Answer the questions that follow. Q P 0 $5 1 $5 2 $5 3 $5 4 $5 5 $5 CRC Economics

  14. Questions to answer Q P TR AR MR 0 $5 $0 - - 1 $5 $5 $5 $5 2 $5 $10 $5 $5 3 $5 $15 $5 $5 4 $5 $20 $5 $5 5 $5 $25 $5 $5 Calculate total revenue (TR), where TR = P x Q. Calculate average revenue (AR), revenue per unit, where AR = TR / Q. Calculate marginal revenue (MR), the revenue earned when selling one more unit, where MR = DTR / DQ. CRC Economics

  15. Questions to answer Q P TR AR MR 0 $5 $0 - - 1 $5 $5 $5 $5 2 $5 $10 $5 $5 3 $5 $15 $5 $5 4 $5 $20 $5 $5 5 $5 $25 $5 $5 What are the special features of a firm in perfect competition? 1. Price P is fixed , constant, unchanged. 2. (P = AR) = MR (D) Special notes: (1) P = AR (always); (2) AR is also the firm’s demand curve (D). CRC Economics

  16. b. Revenue curves of a firm in perfect competition P TR = PQ The TR curve is a straight line. It starts from the point of origin and slopes upward. The AR and MR curves are also straight lines. They coincide and are horizontal, starting from the constant price P. $5 P = AR= MR (D) CRC Economics 0 1 Q

  17. Imperfect/no competition • Given the information below about a firm in imperfect/no competition: • Answer the questions that follow. Q P 0 $10 1 $8 2 $6 3 $4 4 $2 5 $0 CRC Economics

  18. Questions to answer Q P TR AR MR 0 $10 $0 - - 1 $8 $8 $8 $8 2 $6 $12 $6 $4 3 $4 $12 $4 $0 4 $2 $8 $2 -$4 5 $0 $0 $0 -$8 Calculate total revenue (TR), where TR = P x Q. Calculate average revenue (AR), revenue per unit, where AR = TR / Q. Calculate marginal revenue (MR), the revenue earned when selling one more unit, where MR = DTR / DQ. CRC Economics

  19. Questions to answer Q P TR AR MR 0 $10 $0 - - 1 $8 $8 $8 $8 2 $6 $12 $6 $4 3 $4 $12 $4 $0 4 $2 $8 $2 -$4 5 $0 $0 $0 -$8 What are the special features of a firm in imperfect/no competition? 1. Price P is variable. To sell more, the firm must lower price. 2. (P = AR) > MR CRC Economics

  20. b. Revenue curves of a firm in imperfect/no competition P M TR = PQ The TR curve is an upside down parabola, starting from the point of origin. TR is maximized at M. $8 When MR = 0, TR is maximized, at Ed = 1. Ed = 1 The AR curve is a downward- sloping straight line. MR P = AR (D) The MR curve is also a downward- sloping straight line. CRC Economics 0 5 Q

  21. 3. How to calculate and graph different product curves? • Given the information below about a firm in the short run: • Answer the questions that follow. L Q 0 0 1 6 2 11 3 15 4 18 5 20 CRC Economics

  22. Questions to answer L Q APL MPL 0 0 - - 1 6 6.0 6.0 2 11 5.5 5.0 3 15 5.0 4.0 4 18 4.5 3.0 5 20 4.0 2.0 Calculate average product of labor (APL), where APL= Q / L. Calculate marginal product of labor (MPL), the product/output obtained when hiring one more worker, where MPL = DQ / DL. CRC Economics

  23. Questions to answer L Q APL MPL 0 0 - - 1 6 6.0 6.0 2 11 5.5 5.0 3 15 5.0 4.0 4 18 4.5 3.0 5 20 4.0 2.0 What happens to Q, APL, and MPL, when L rises? Why? When L rises, i.e. more workers are employed, output Q rises, APL falls, and MPL falls. The principle of diminishing marginal product of labor takes effect. As L rises, MPL falls, and the production function becomes flatter. CRC Economics

  24. Product curves—TP = Q M Maximum output Q Shutdown point S TP = Q Where a line from the point of origin is tangent to the curve. Relevant section R Diminishing return point Where the law of diminishing returns takes effect. The tangent line goes through the curve. Z Zero output L CRC Economics

  25. Product curves—AP & MP Q R MP Relevant section S AP M Z L CRC Economics

  26. 4. How to calculate and graph different cost curves? • Given the information below about a firm in the short run, where Q = output, FC = fixed cost, and VC = variable cost. • Answer the questions that follow. Q FC VC 0 $16 $0 1 $18 2 $31 3 $41 4 $49 5 $59 6 $72 7 $90 8 $114 9 $145 10 $184 CRC Economics

  27. Questions to answer Q FC VC 0 $16 $0 1 $16 $18 2 $16 $31 3 $16 $41 4 $16 $49 5 $16 $59 6 $16 $72 7 $16 $90 8 $16 $114 9 $16 $145 10 $16 $184 What is FC at other levels of output? Hint: FC is fixed at all levels of output. CRC Economics

  28. Questions to answer Q FC VC TC AFC AVC 0 $16 $0 $16 - - 1 $16 $18 $34 $16.0 $18.0 2 $16 $31 $47 $8.0 $15.5 3 $16 $41 $57 $5.3 $13.7 4 $16 $49 $65 $4.0 $12.3 5 $16 $59 $75 $3.2 $11.8 6 $16 $72 $88 $2.7 $12.0 7 $16 $90 $106 $2.3 $12.9 8 $16 $114 $130 $2.0 $14.3 9 $16 $145 $161 $1.8 $16.1 10 $16 $184 $200 $1.6 $18.4 Calculate total cost, TC, where TC = FC + VC. Calculate average fixed cost, AFC, where AFC = FC / Q. Calculate average variable cost, AVC, where AVC = VC / Q. CRC Economics

  29. Questions to answer Q FC VC TC AFC AVC ATC MC 0 $16 $0 $16 - - - - 1 $16 $18 $34 $16.0 $18.0 $34.0 $18.0 2 $16 $31 $47 $8.0 $15.5 $23.5 $13.0 3 $16 $41 $57 $5.3 $13.7 $19.0 $10.0 4 $16 $49 $65 $4.0 $12.3 $16.3 $8.0 5 $16 $59 $75 $3.2 $11.8 $15.0 $10.0 6 $16 $72 $88 $2.7 $12.0 $14.7 $13.0 7 $16 $90 $106 $2.3 $12.9 $15.1 $18.0 8 $16 $114 $130 $2.0 $14.3 $16.3 $24.0 9 $16 $145 $161 $1.8 $16.1 $17.9 $31.0 10 $16 $184 $200 $1.6 $18.4 $20.0 $39.0 Calculate average total cost, ATC, where ATC = TC / Q = AFC + AVC. Calculate marginal cost, MC, the cost of producing one more unit, where MC = DVC / DQ = DTC / DQ. CRC Economics

  30. Questions to answer Q FC VC TC AFC AVC ATC MC 0 $16 $0 $16 - - - - 1 $16 $18 $34 $16.0 $18.0 $34.0 $18.0 2 $16 $31 $47 $8.0 $15.5 $23.5 $13.0 3 $16 $41 $57 $5.3 $13.7 $19.0 $10.0 4 $16 $49 $65 $4.0 $12.3 $16.3 $8.0 5 $16 $59 $75 $3.2 $11.8 $15.0 $10.0 6 $16 $72 $88 $2.7 $12.0 $14.7 $13.0 7 $16 $90 $106 $2.3 $12.9 $15.1 $18.0 8 $16 $114 $130 $2.0 $14.3 $16.3 $24.0 9 $16 $145 $161 $1.8 $16.1 $17.9 $31.0 10 $16 $184 $200 $1.6 $18.4 $20.0 $39.0 Is there a minimum value for AFC? No, AFC has no minimum. As Q rises, AFC falls. CRC Economics

  31. Questions to answer Q FC VC TC AFC AVC ATC MC 0 $16 $0 $16 - - - - 1 $16 $18 $34 $16.0 $18.0 $34.0 $18.0 2 $16 $31 $47 $8.0 $15.5 $23.5 $13.0 3 $16 $41 $57 $5.3 $13.7 $19.0 $10.0 4 $16 $49 $65 $4.0 $12.3 $16.3 $8.0 5 $16 $59 $75 $3.2 $11.8 $15.0 $10.0 6 $16 $72 $88 $2.7 $12.0 $14.7 $13.0 7 $16 $90 $106 $2.3 $12.9 $15.1 $18.0 8 $16 $114 $130 $2.0 $14.3 $16.3 $24.0 9 $16 $145 $161 $1.8 $16.1 $17.9 $31.0 10 $16 $184 $200 $1.6 $18.4 $20.0 $39.0 Is there a minimum value for MC? Yes, the minimum point of MC (point R) occurs where P =$8.0, and Q = 4. MC falls, reaches the minimum, then rises. The MC curve is U-shaped. CRC Economics

  32. Questions to answer Q FC VC TC AFC AVC ATC MC 0 $16 $0 $16 - - - - 1 $16 $18 $34 $16.0 $18.0 $34.0 $18.0 2 $16 $31 $47 $8.0 $15.5 $23.5 $13.0 3 $16 $41 $57 $5.3 $13.7 $19.0 $10.0 4 $16 $49 $65 $4.0 $12.3 $16.3 $8.0 5 $16 $59 $75 $3.2 $11.8 $15.0 $10.0 6 $16 $72 $88 $2.7 $12.0 $14.7 $13.0 7 $16 $90 $106 $2.3 $12.9 $15.1 $18.0 8 $16 $114 $130 $2.0 $14.3 $16.3 $24.0 9 $16 $145 $161 $1.8 $16.1 $17.9 $31.0 10 $16 $184 $200 $1.6 $18.4 $20.0 $39.0 Is there a minimum value for AVC? Yes, the minimum point of AVC (point S) occurs where P =$11.8, and Q = 5. AVC falls, reaches a minimum, then rises. The AVC curve is U-shaped. CRC Economics

  33. Questions to answer Q FC VC TC AFC AVC ATC MC 0 $16 $0 $16 - - - - 1 $16 $18 $34 $16.0 $18.0 $34.0 $18.0 2 $16 $31 $47 $8.0 $15.5 $23.5 $13.0 3 $16 $41 $57 $5.3 $13.7 $19.0 $10.0 4 $16 $49 $65 $4.0 $12.3 $16.3 $8.0 5 $16 $59 $75 $3.2 $11.8 $15.0 $10.0 6 $16 $72 $88 $2.7 $12.0 $14.7 $13.0 7 $16 $90 $106 $2.3 $12.9 $15.1 $18.0 8 $16 $114 $130 $2.0 $14.3 $16.3 $24.0 9 $16 $145 $161 $1.8 $16.1 $17.9 $31.0 10 $16 $184 $200 $1.6 $18.4 $20.0 $39.0 Is there a minimum value for ATC? Yes, the minimum point of ATC (point B) occurs where P =$14.7, and Q = 6. ATC falls, reaches a minimum, then rises. The ATC curve is U-shaped. CRC Economics

  34. Cost curves—FC, VC, and TC $ TC VC Point B is where a line from the point of origin is tangent to the TC curve. It is called the breakeven point (in PC). B R R FC S Point S is where a line from the point of origin is tangent to the VC curve. It is called the shutdown point (in PC). Q CRC Economics

  35. Cost curves—AVC, ATC, and MC $ MC ATC AVC B R S Q CRC Economics

  36. Cost curves (in perfect competition) $ MC ATC AVC Breakeven price B Pbr Psh R Shutdown price S Q CRC Economics

  37. 4. How to calculate the profit-maximizing output level, Q*? Q P TC • Given the following information for a firm: • Answer the questions that follow. 0 $60 $30 1 $60 $42 2 $60 $66 3 $60 $102 4 $60 $150 5 $60 $210 6 $60 $282 7 $60 $366 8 $60 $462 9 $60 $570 10 $60 $690 CRC Economics

  38. Questions to answer Q P TR TC P MR MC MP 0 $60 $0 $30 -$30 - - - 1 $60 $60 $42 $18 $60 $12 $48 2 $60 $120 $66 $54 $60 $24 $36 3 $60 $180 $102 $78 $60 $36 $24 4 $60 $240 $150 $90 $60 $48 $12 5 $60 $300 $210 $90 $60 $60 $0 6 $60 $360 $282 $78 $60 $72 -$12 7 $60 $420 $366 $54 $60 $84 -$24 8 $60 $480 $462 $18 $60 $96 -$36 9 $60 $540 $570 -$30 $60 $108 -$48 10 $60 $600 $690 -$90 $60 $120 -$60 Calculate TR and economic profit, P, where P = TR – TC. Calculate MR, MC, and MP, where MP = MR – MC. CRC Economics

  39. Questions to answer Q P TR TC P MR MC MP 0 $60 $0 $30 -$30 - - - 1 $60 $60 $42 $18 $60 $12 $48 2 $60 $120 $66 $54 $60 $24 $36 3 $60 $180 $102 $78 $60 $36 $24 4 $60 $240 $150 $90 $60 $48 $12 5 $60 $300 $210 $90 $60 $60 $0 6 $60 $360 $282 $78 $60 $72 -$12 7 $60 $420 $366 $54 $60 $84 -$24 8 $60 $480 $462 $18 $60 $96 -$36 9 $60 $540 $570 -$30 $60 $108 -$48 10 $60 $600 $690 -$90 $60 $120 -$60 What is the profit-maximizing output level, Q*? Hint: Q* is produced where MP = 0, or MR = MC. Q* = 5, where P = $90, and MR = MC = $60. CRC Economics

  40. Graphical approach $ Q* is found on the quantity axis where MR = MC. MC E MR Q Q* CRC Economics

  41. Now you know … • how to calculate different types of profits. • how to calculate and graph different revenue curves. • how to calculate and graph different product curves. • how to calculate and graph different cost curves. • how to calculate the profit-maximizing output level. CRC Economics

  42. See You! Take Care! CRC Economics

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