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Microeconomic Problem Set on Cost and Revenue in Perfectly Competitive Markets, Assignments of Microeconomics

Shepherd UniversityMicroeconomics

A problem set related to microeconomic concepts of cost and revenue in perfectly competitive markets. It covers short-run and long-run cost functions, fixed and variable costs, average total cost, average variable cost, marginal cost, total revenue, marginal revenue, and profit. It also discusses the shutdown point and economic profit.

Typology: Assignments

Pre 2010

Uploaded on 08/16/2009

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koofers-user-x8a 🇺🇸

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PROBLEM SET 4
Problems for Chapters 7 and 8
1.
OUTPUT
TOTAL
FIXED
COST
TOTAL
VARIABLE
COST
TOTAL
COST
MARGINAL
COST
AVERAGE
VARIABLE
COST
AVERAGE
TOTAL
COST
P=$22
TOTAL
REVENUE
P=$22
MARG.
REV.
P=$22
PROF.
0 $65 $0 -- -- -- --
1 13
2 22
3 28
4 36
5 46
6 58
7 72
8 88
9 106
10 126
11 148
12 172
a. Complete the blank columns in the chart above.
b. These figures are short-run costs. How can you tell?
c. Suppose that a perfectly competitive firm faces these costs and that the
short-run market price is $22 per unit of output. Calculate total
revenue, marginal revenue, and profit for all levels of output. At this
price, how many units of output will the firm sell? Explain your choice.
d. Suppose the market price falls to $15 per unit of output. Calculate total
revenue, marginal revenue, and profit for all levels of output. Would the
firm still operate at this price in the short-run? Why or why not? At this
price will the firm still operate in the long-run?
OUTPUT
TOTAL
FIXED
COST
TOTAL
VARIABLE
COST
TOTAL
COST
MARGINAL
COST
AVERAGE
VARIABLE
COST
AVERAGE
TOTAL
COST
P=$15
TOTAL
REVENUE
P=$15
MARG.
REV.
P= $15
PROF.
0 $65 $0 -- -- -- --
1 13
2 22
3 28
4 36
5 46
6 58
7 72
8 88
9 106
10 126
11 148
12 172
e. What is the lowest price at which this firm will operate in the short-run
(i.e. find the short-run shutdown point)? Explain.
pf3
pf4
pf5
pf8

Partial preview of the text

Download Microeconomic Problem Set on Cost and Revenue in Perfectly Competitive Markets and more Assignments Microeconomics in PDF only on Docsity!

PROBLEM SET 4

Problems for Chapters 7 and 8

OUTPUT TOTAL FIXED COST TOTAL VARIABLE COST TOTAL COST MARGINAL COST AVERAGE VARIABLE COST AVERAGE TOTAL COST P=$ TOTAL REVENUE P=$ MARG. REV. P=$ PROF. 0 $65 $0 -- -- -- -- 1 13 2 22 3 28 4 36 5 46 6 58 7 72 8 88 9 106 10 126 11 148 12 172 a. Complete the blank columns in the chart above. b. These figures are short-run costs. How can you tell? c. Suppose that a perfectly competitive firm faces these costs and that the short-run market price is $22 per unit of output. Calculate total revenue , marginal revenue , and profit for all levels of output. At this price, how many units of output will the firm sell? Explain your choice. d. Suppose the market price falls to $15 per unit of output. Calculate total revenue , marginal revenue , and profit for all levels of output. Would the firm still operate at this price in the short-run? Why or why not? At this price will the firm still operate in the long-run? OUTPUT TOTAL FIXED COST TOTAL VARIABLE COST TOTAL COST MARGINAL COST AVERAGE VARIABLE COST AVERAGE TOTAL COST P=$ TOTAL REVENUE P=$ MARG. REV. P= $ PROF. 0 $65 $0 -- -- -- -- 1 13 2 22 3 28 4 36 5 46 6 58 7 72 8 88 9 106 10 126 11 148 12 172 e. What is the lowest price at which this firm will operate in the short-run (i.e. find the short-run shutdown point)? Explain.

  1. Suppose that a perfectly competitive firm has the following short-run cost functions. ATC Costs ($) MC AVC $ $ 6 Q a. How can you tell that these are short-run cost functions (rather than long- run cost functions)? b. For each of the following MARKET PRICES, determine: i. whether or not the firm should produce in the short-run or shut down. ii. the optimal point of production graphically. iii. whether the firm will make an economic profit or loss if it produces. MARKET PRICE = $11. MARKET PRICE = $7. MARKET PRICE = $4.
  2. What does an economic profit equal to zero mean? What does a positive or negative economic profit mean?
  3. Your aunt has just closed her books from her first year in the retail cookie business and is ecstatic with the profit her accountant says she has earned. The store earned $115,000 in sales revenue over the year, and its costs for rent, raw materials, electricity, and the like were $80,000. Your uncle is not quite as elated, but can’t figure out exactly why. In discussing the situation with you (the family economist), he offers the following information. Your aunt gave up her job, which was paying her $22,000 a year, at a local corporation. Your uncle worked in the store every evening and most weekends – giving up the opportunity to take on additional clients for his law practice. In addition to being tired, he figures that he lost $15,000 in additional income. Would you recommend that your aunt keep the cookie business running for the next year? Explain.

b. The existence of fixed costs implies that some resources are fixed. Resources are fixed in the short-run and therefore these are short-run costs. c. 10 or 11 units. d. P = $15: OUTPUT TR MR=P PROFITS 0 0 -- - 1 15 15 - 2 30 - 3 45 - 4 60 - 5 75 - 6 90 - 7 105 - 8 120 - 9 135 - 10 150 - 11 165 - 12 180 - e. Short-run shutdown point occurs when price = min. AVC = $9.

  1. a. The difference between ATC and AVC is AFC. Thus, there are fixed costs, implying fixed resources that only exist in the short-run ==>these are short- run cost curves. b. P = $11 : i. produce ii. produce output where P = MC = $11. iii. loss because P = $11 is less than min. ATC. P = $7 : Same as above. P = $4 : i. do not produce because P < min. AVC ii. optimal Q = 0 iii. loss = TFC (NOTE: there is not enough info to calculate precisely).
  2. Economic profit = 0 means that the firm’s owner is earning normal accounting profits , i.e. accounting profits are exactly equal to the owner’s implicit opportunity costs (what his labor and capital could earn in their next best alternative occupations). YOU figure out what econ. profit < or > 0 means.
  3. Calculate economic profits: Revenue $115, Explicit Costs - 80, Implicit Costs - 22,000 (aunt’s alternative earnings)
    • 15,000 (uncle’s lost income)
      • 2, Econ. Proft < 0  accounting profits (115,000-80,000=35,000) are less than implicit owners’ opportunity costs ((37,000). ADVICE: SHUT-DOWN. SHORT-RUN: produce 7 units of output to minimize losses. NOTE: There is NOT a level of output where MC = exactly $15. Thus, the firm should produce all units of output where P ($15) > MC ( Q’s from 1 through 7). It should NOT produce the 8th unit of Q because P ($15) < MC ($16). LONG-RUN: If the firm can move to a different plant size (on its LRATC curve) and make at least zero economic profits, it should continue to operate. If it cannot do so it should shut down.

ACCOUNTING COSTS: $12 + $5 + $20 = $ ECONOMIC COSTS: $37 + $15 = $ ACCOUNTING PROFITS: $72 - $37 = $ ECONOMIC PROFITS: $72 - $52 = $ Econ. Profit > 0  Charlie’s accounting profits exceed his implicit opportunity costs (or accounting profits are above normal ).

  1. a. $9, b. Owner’s labor services and interest forgone on his $30,000 investment in the business. c. $48,000 + (.10 x 30,000) + 10,000 = $61, owner’s opportunity costs d. Economic profit = - $4,000economic loss of $4,000. ANSWERS TO PROBLEMS IN TEXT pp. P13-P14:
  2. a. Q MR = P TR TC PROFIT MC 0 $60 $0 $50 - $50 -- 1 60 60 70 -10 $ 2 60 120 110 10 40 3 60 180 170 10 60 4 60 240 240 0 70 5 60 300 330 -30 90 b. $ MC $60 A D = P = MR 3 Q c and d. Maximum profit occurs at 3 units of output where P = MC. Even though you were not asked to calculate profits, it’s a good idea
  1. Calculating the table below will help in solving this problem : DEMAND Q TR TC PROFIT P=MR ATC MC 0 0 50 -50 21 N/A N/A 1 21 55 -34 21 55 5 2 42 62 -20 21 31 7 3 63 75 -12 21 25 13 4 84 96 -12 21 24 21 5 105 125 -20 21 25 29 6 126 162 -36 21 27 37 7 147 203 -56 21 29 41 8 168 248 -80 21 31 45 a. Fixed Cost = $50 (TC at Q = 0). b. c. d. Profit is maximized (actually, the loss is minimized at 4 (or 3) units of output. e.-g. The profit-maximizing output produces a loss of $12, but shutting down would result in a loss of $50. Thus, some of the fixed costs are recovered by staying in business, so the firm should stay in business in the short-run. 0 50 100 150 200 250 300 0 1 2 3 4 5 6 7 8 9 Output (cartridges per day) Revenue or Cost (per day) (^) TR TC TR TC 0 10 20 30 40 50 60 0 1 2 3 4 5 6 7 8 Output (cartridges per day) Price or Cost (per cartridge) DEMAND ATC D MC MC ATC

p. P-15:

  1. If the farmer were incurring a loss at price p 1 , the market price would be less than minimum long-run average total cost, and the firm would produce Q 1 at point A in the left diagram below. The lone farmer The market The price would rise if firms started to exit the industry. This would shift the market supply curve in the right diagram to the left (see below). Firms would exit until price had risen to equality with minimum ATC. The lone farmer The market

$ MC

ATC

min.ATC A p 1 D=P=MR Q 1 Q

P

S

A

p 1 D Q 1 Q $ MC ATC B p 2 = min.ATC p 1 A Q 1 Q 2 Q

P

S’

B

p 2 S p 1 A D Q 2 Q 1 Q