Ch 14 Problems and Applications 1-6:
• #1. What are the characteristics of a competitive market?
•
•
•
•
•
•
•
Many buyers/sellers
Each has negligible impact
Price taker
Identical (same) goods
Free entry/exit
= access to info./technology
Which of the following drinks do you think is best described by these
characteristics? Tap water bottled water
cola
beer
Tap water bottled water
cola
beer ……..why?
• Why aren’t the others?
Tap water is a natural monopoly
Cola and beer have wide variety – so the goods are not all the same
2. Sold 200 doses and faces following ATC
Q
ATC
ATC x Q = TC
199
199
39601
200
200
40000
201
201
40401
MC
399
401
If a new customer offers to pay her $300 for one dose, should
she make one more? Explain
Need to know if MC is > or < $300….
So need to know TC …..
Since the MC of making one more dose is $401 and the MR is $300,
then she should not make it
3. Licorice industry is competitive. Each firm produces 2million
strings/year. ATC of $0.20 and Price of $0.30
•
•
•
•
•
A. What is the MC of a string?
If profit maximizing where MR = MC
…….since MR = P……..then P=MC…..
So the MC of a string is $0.30
B. Is this industry in long run equilibrium?
Why or Why not?
• No …
• In LRE, P = MC = ATC and here the P (.30) > ATC (.20)
0.30
0.20
#4. Order $40 Lobster dinner. You eat ½ of it and are now full.
She says “finish it, cant take it home and already paid for it”
What should you do?
• Once you have ordered it, it is a sunk cost
• So now it does not represent an opportunity
cost
• The cost of your dinner should not influence
your decision to eat it or not
•
•
•
•
•
•
•
•
•
•
#5. Bob’s lawn mowing is profit max.
P = $27
TC each day = $280 ($30 is fixed)
Q = 10 lawns/day
Short run shut down decision?
TR < VC?
TR = 270 > VC 250
Or P< AVC ?
P = 27 > AVC = VC/Q 250/10 = 25
So….don’t shut down
•
•
•
•
•
•
•
Long Run Exit decision?
TR < TC?
TR = 270 < TC = 280
Or
P < ATC?
P = 27 < ATC = TC/Q 280/10 = 28
So……he should exit in long run
#6
Q
TC
TR
0
8
0
1
9
8
2
10
16
3
11
24
4
13
32
5
19
40
6
27
48
7
37
56
Profit
MR
MC
Q
TC
TR
Profit
0
8
0
-8
1
9
8
-1
2
10
16
6
3
11
24
13
4
13
32
19
5
19
40
21
6
27
48
21
7
37
56
19
a. Calculate profit
TR-TC
How much should the firm
produce to max profit?
MR
MC
Q
TC
TR
Profit
MR
MC
0
8
0
-8
1
9
8
-1
8
1
2
10
16
6
8
1
3
11
24
13
8
1
4
13
32
19
8
2
5
19
40
21
8
6
6
27
48
21
8
8
7
37
56
19
8
10
B. Calculate MR and MC
Graph them
At what Q do these curves cross?
How does this relate to answer in A
about max profit?
Cross between 5, 6 units
and this is same as table in
A
• C. Can you tell whether this firm is in a
competitive industry?
• Yes it is competitive because MR = P at each
Q
• are they in long run equilibrium?
• No , not in LRE because they have positive
economic profits at profit max point MR= MC
($21 at Q 5 and Q6) :
• LRE = zero economic profits