1 / 22

MICROECONOMICS EV Prof. Davide Vannoni

MICROECONOMICS EV Prof. Davide Vannoni. Firm in perfectly competitive market Short-run and long-run competition Price support (see lecture slides) Import quota (see lecture slides) Gasoline Tax (see lecture slides). Exercise session 3. Exercises. Exercise n. 1.

ulysses-miller
Download Presentation

MICROECONOMICS EV Prof. Davide Vannoni

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. MICROECONOMICSEVProf. Davide Vannoni

  2. Firm in perfectly competitive market Short-run and long-run competition Price support (see lecture slides) Import quota (see lecture slides) Gasoline Tax (see lecture slides) Exercise session 3 Exercises

  3. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Exercise n.1 Firm WWW (see exercise session 2) works in a perfectly competitive market, and bears the following costs: FC = fixed costs VC= var costs CT= tot costs MC= marginal c. AC*=average c.* * = V, F, T

  4. Microeconomia C, A.A. 2007-2008 Esercitazione 3 If the price is 40 € compute: total revenues (TR), marginal revenue (MR) and profit.

  5. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Answer the following questions: • At which quantity profits are maximized? The quantity in correspondence of which marginal revenue is equal to marginal cost (MR = MC), therefore Q = 8. • Which will be the profit (loss) at the above quantity? Profit = Revenues – VC – FC In correspondence of Q = 8, Profit = 320 –190 - 46= 84 €

  6. Microeconomia C, A.A. 2007-2008 Esercitazione 3 MC Profit P= MR ATC AVC

  7. Microeconomia C, A.A. 2007-2008 Esercitazione 3 • How much will be the producer's surplus? Producer's surplus = Revenues – VC or Surplus = Profit + FC = 84 + 36 = 130 € • Will the firm continue to produce in the long run? Since the profit is positive, yes!

  8. Microeconomia C, A.A. 2007-2008 Esercitazione 3 • Notice The producer's surplus can be measured - as the difference between revenues and variable costs ( PQ - QAVC ), - as the sum, for all quantities up to that level, of the differences between price and marginal cost: look at the column Profit (MR –MC) : 10+20+32+34+20+10+4+0=130 (This is shown in the two following graphs)

  9. Microeconomia C, A.A. 2007-2008 Esercitazione 3 MC P = MR ATC AVC Producer's Surplus

  10. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Producer's surplus MC P= MR ATC AVC

  11. Microeconomia C, A.A. 2007-2008 Esercitazione 3 If the price reduces up to 20 €, which will be the profit maximizing quantity in the short run? What will happen in the long run? The profit is maximized when MC= MR = P, that is in correspondence of MC = 20 €, i.e. for Q = 5. Profit = 100 - 84 - 46= - 30 € (loss) In the short run the firm is not making profits but reduces losses: since it cannot modify its structure (reason for which cost fixed exist), it continue to produce until (after recovering variable costs) there will be a positive margin to be used to partly recover fixed costs.

  12. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Recall the closure condition: AVC > P - in the short run, the firm will continue to produce until the producer's surplus is positive. - in the long run, all costs are variable; the firm will continue to produce only if the profit is positive. In the long run, in our example, the firm will shut down!

  13. Microeconomia C, A.A. 2007-2008 Esercitazione 3 MC Loss ATC AVC P=MR

  14. Microeconomia C, A.A. 2007-2008 Esercitazione 3 d) If the price reduces up to 15 €, which will be the profit (or the loss) in the case in which the firm will continue to produce? What should the firm do in the short run? For p=15 € the optimal choice will be to produce 4 units (the maximum quantity for which MC<MR). Revenues will be lower than VC, and the difference (not recovered) will be added to the fixed costs. By producing there will be a loss equal to: TR – (VC + FC) = 60 - ( 64 + 46 ) = - 50 € The surplus will be negative: Profits + FC= - 50 + 46 = - 4 €  The firm in the short run will stop the production!

  15. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Loss Loss due to VC MC ATC AVC P=MR

  16. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Exercise n.2 Consider a market in which there are 1000 consumers with demand pd= 8 - qd and 100 producers with the following cost function TC= 10 + 2qs + (1/40) qs2. Find the market equilibrium. Compute the profits of producers and tell what will happen in a perfectly competitive market in the long run: what will be the price, the manufactured quantities, the profits?

  17. Microeconomia C, A.A. 2007-2008 Esercitazione 3 To find the equilibrium we have to find the aggregate demand and supply functions. Inverse demand function: direct demand function: Aggregating for1000 individuals: pd = 8 – qd qd = 8 – pd Qd =  qd = 8000 – 1000pd The supply function coincides with the increasing portion of the MC which lies above the AVC: Marginal Cost = TC/ Q  MC = 2 + (1/20) qs Inverse supply: ps= 2 + 1/20 qs Direct supply: qs = 20ps- 40

  18. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Aggregating for 100 firms: Qs=2000 ps - 4000 The market equilibrium is the price-quantity combination for which Qs= Qd 2000p - 4000 = 8000 - 1000 p p* = 4 Q* = 4000 qs*= 40 ; qd*= 4

  19. Microeconomia C, A.A. 2007-2008 Esercitazione 3 • Each producer earns a profit equal to: TR = 4 · (40) = 160 TC = 10 + 2 · (40) + 1/40 · (402) = 130 Profits = 30 The other firms will presumably enter the market attracted from the profit opportunities. The long run equilibrium is where the Marginal Cost equals the Average Cost. MC = ATC  2 + 1/20 · q = (10 + 2·q + 1/40 · q2)/q 2 + 1/20 · q = 10/q + 2 + 1/40 · q 1 /40 · q = 10/q  q2 = 400  q = 20 Each firm will therefore produce a quantity equal to 20  MC = ATC = 3

  20. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Since the price must equal the marginal cost, p = 3. The aggregate quantity bought on the market will be: Qd = 8000 - 1000 · 3 = 5000 There will be 250 firms (5000/20); the profit will be TR – TC, therefore: TR = 3 · 20 = 60 TC = 10 + 2 · 20 + 1/40 · 400 = 60 Profit = TR – TC = 0

  21. Microeconomia C, A.A. 2007-2008 Esercitazione 3 P P Firm Supply 8 Aggregate Demand Aggregate Supply Individual Demand 4 8 4000 Q 40 4000 Q Graphically: P = 4 2

  22. Microeconomia C, A.A. 2007-2008 Esercitazione 3 Due to the entry of new firms, the aggregate supply will be flatter and the equilibrium price reduces from 4 to 3; the quantity will be 5000: P Aggregate Demand 8 Aggregate Supply (before entry) Aggregate Supply (before entry) 4 3 2 Q 5000 4000

More Related