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President Clinton’s “Level Playing Field” Claim

President Clinton’s “Level Playing Field” Claim.

judah-potts
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President Clinton’s “Level Playing Field” Claim

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  1. President Clinton’s “Level Playing Field” Claim 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 questions concerning his health care proposal. One question 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’s “Level Playing Field” Claim: Since the costs of all pizza firms would increase, an individual firm would not be hurt. Strategy: Two Questions First Question: Where does the market supply curve come from? We shall 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 on the quantity of output to produce?

  2. Market Equilibrium The equilibrium price and quantity are determined by the market demand and market supply curves. First Question: Where does the market supply curve come from? Claim: The market supply curve is the horizontal sum of each individual firm’s supply curve. Market Supply Curve: How many cans of beer would firms produce(the quantity supplied), if the price of beer were _______, given that everything else relevant to the supply of beer remains the same 1.00 1.50 2.00 .50 A Firm’s Individual Supply Curve: How many cans of beer wouldthe firm produce (the firm’s quantity supplied), if the price of beer were ______, given that everything else relevant to the supply of beer remains the same. .50 1.50 1.00 2.00 Firm B Market Firm A P P P SA SB S If P=2.00 If P=1.50 If P=1.00 If P=.50 q q q

  3. 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 = Total Revenue  Total Cost = TRTC 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 quantity of beer. Is Anheuser-Busch presently maximizing profits? If not, should more beer be produced or should less beer be produced? Mr. Busch, the president of Anheuser-Busch, hires you as a consultant. He wants to know if he is producing the profit maximizing quantity of beer. What information do you need to determine whether or not the profit maximizing quantity is being produced? In 2013: Total Revenue = $32.0 billion Quantity = $50.0 billion cans Total Cost = $22.5 billion Price = $.64 Profit = $9.5 billion Average Total Cost = $.45 Does this help you determine if profits are currently being maximized?

  4. 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 = Total Revenue  Total Cost = TRTC One additional unit of output One fewer unit of output $1.00  $.20  $.80 $1.00 $1.10  $.10 Question: What information do we need to determine if profits are being maximized? Marginal Revenue (MR): Marginal Cost (MC): Change in the firm’s total revenue resulting from a one unit change in the quantity of output produced. Change in the firm’s total cost resulting in a one unit change in the quantity of output produced. Scenario 1: MR = $1.00 and MC = $.80 If one additional unit of output were produced, TC would rise by $.80 If one additional unit of output were produced, TR would rise by $1.00 Scenario 2: MR = $1.00 and MC = $1.10 If one fewer unit of output were produced, TC would fall by $1.10 If one fewer unit of output were produced, TR would fall by $1.00 MR > MC MR < MC More production increases profit. Less production increases profit.

  5. Marginal Revenue Curve: In a perfectly competitive industry a firm’s marginal revenue curve is horizontal equal to the price. Perfectly competitive industry Large number of small independent firms MR=Price A single firm’s production decisions do not affect the price significantly q Claim: Each firm takes the price as a given, as a constant: MR = Price Marginal Revenue (MR): Change in the firm’s total revenue resulting from a one unit change in production. Marginal revenue (MR) curve is horizontal equal to the price. Justifying the claim: What happens to total revenue when one additional unit of output is produced; that is, when the quantity (q) increases by 1. Initial Total Revenue: TR = Price×q Increase q by one unit: q  q + 1 New Total Revenue: TR = Price×(q + 1) = Price×q + Price Change in Total Revenue: MR = Price

  6. Increasing Total Cost and Increasing Marginal Cost Increasing Total Cost: As a firm produces more output, its total cost increases. 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. Geometrically, this means that a firm’s marginal cost is upward sloping. MC Marginal Cost (MC): Change in the firm’s total cost resulting from a one unit change in production. q Increasing Marginal Cost and Decreasing Marginal Product Marginal Product of Labor: Change in the quantity 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. Claim: Increasing marginal cost and decreasing marginal product are two different ways of viewing the same phenomenon.

  7. Mr. Atkins Apple Orchard Marginal Product Labor Hired (hours) Total Apples Picked (bushels) Marginal Product of Labor: Change in the quantity of output produced resulting from a one unit change in the amount of labor hired. 0 0.0 1.0 1 1.0 1.0 2 2.0 1.0 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. 3 3.0 0.6 4 3.6 0.4 5 4.0 Wage Rate: $10 per hour Total Apples Picked (bushels) Labor Hired (hours) Total Labor Costs Marginal Cost Marginal Cost: The change in its total cost resulting from a one unit change in production. 0.0 0 0 10 1.0 1 10 10 Increasing Marginal Cost: As a firm produces more output, its marginal cost increases. 2.0 2 20 10 3.0 3 30 20 4.0 5 50 Increasing marginal cost and decreasing marginal product are two different ways of viewing the same phenomenon.

  8. Market Equilibrium The equilibrium price and quantity are determined by the market demand and market supply curves. First Question: Where does the market supply curve come from? The market supply curve is the horizontal sum of each individual firm’s supply curve. Second Question: Where does an individual firm’s supply curve come from? Marginal Revenue (MR): Change in the firm’s total revenue resulting from a one unit change in the quantity of output produced. Profit Maximization Marginal Cost (MC): Change in the firm’s total cost resulting from a one unit change in the quantity of output produced. MR > MC MR = MC MR < MC Less production increases profit More production increases profit Profit is maximized MC Marginal Cost Curve:Upward Sloping Marginal Revenue and Perfect Competition: MR = P MR=P q q*

  9. 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 A’s supply curve: How many cans of beer would firm A produce, if the price of beer were _____, given that everything else relevant to the supply of beer remains the same? 1.50 1.00 .50 Profit Maximization: Produce the quantity of output at which MR = MC. P MC S If P = 1.50 MR = 1.50 If P = 1.00 MR = 1.00 If P = .50 MR = .50 q It looks like an individual firm’s supply curve is the firm’s marginal cost curve. In fact, we must add one caveat. 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 and produce nothing.

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