Discussion Session 2
Marginal Benefit
• The following table shows Abby’s willingness to pay for apples
• Calculate her marginal benefit from apples.
Quantity of apples
(pounds)
0
Willingness to pay
1
2
3
$7
$13
$18
4
5
$22
$25
$0
Marginal Benefit
Marginal Benefit
• The following table shows Abby’s willingness to pay for apples
• Calculate her marginal benefit from apples.
Quantity of apples
(pounds)
0
Willingness to pay
Marginal Benefit
$0
-
1
2
3
$7
$13
$18
7
6
5
4
5
$22
$25
4
3
Marginal Benefit
• Let’s draw Abby’s individual demand curve for apples.
• If the market price of apples is $5/lb, how many pounds of
apples will Abby buy?
• Abby will buy if P<MB, until P = MB, so she will buy 3 lbs
of apples.
• What is her consumer surplus?
• It is TB – P x Q = 18 – 5 x 3 = 18 – 15 = 3
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
0
1
8
12
2
3
4
5
15
21
30
50
Average
TC
(ATC)
Average
VC
(AVC)
Marginal
Cost
(MC)
1) Fill out the entries in the table.
2) Suppose that the firm is a price taker, and market price is $9. What
quantity will the firm produce?
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
Average
TC
(ATC)
Average
VC
(AVC)
Marginal
Cost
(MC)
1) Fill out the entries in the table.
2) Suppose that the firm is a price taker, and market price is $9. What
quantity will the firm produce?
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
0
1
8
12
8
8
Marginal
Cost
(MC)
4
2
3
4
5
15
21
30
50
8
8
8
8
3
6
9
20
1) Fill out the entries in the table.
2) Suppose that the firm is a price taker, and market price is $9. What
quantity will the firm produce?
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
0
1
8
12
8
8
4
Marginal
Cost
(MC)
4
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
3
6
9
20
1) Fill out the entries in the table.
2) Suppose that the firm is a price taker, and market price is $9. What
quantity will the firm produce?
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
0
1
8
12
8
8
4
12
Marginal
Cost
(MC)
4
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
7.5
7
7.5
10
3
6
9
20
1) Fill out the entries in the table.
2) Suppose that the firm is a price taker, and market price is $9. What
quantity will the firm produce?
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
4
Average
TC
(ATC)
12
Average
VC
(AVC)
4
Marginal
Cost
(MC)
4
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
7.5
7
7.5
10
3.5
4.33
5.5
8.4
3
6
9
20
2) Suppose that the firm is a price taker, and market price is $9. What
quantity will the firm produce?
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
4
12
4
Marginal
Cost
(MC)
4
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
7.5
7
7.5
10
3.5
4.33
5.5
8.4
3
6
9
20
2) Suppose that the firm is a price taker, and market price is $9. What
quantity will the firm produce?
The firm produces quantity where P = MC. When MC = $9, Q = 4
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
3) What is the profit/loss?
Average
TC
(ATC)
Average
VC
(AVC)
4
12
4
Marginal
Cost
(MC)
4
7
13
22
42
7.5
7
7.5
10
3.5
4.33
5.5
8.4
3
6
9
20
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
4
12
4
Marginal
Cost
(MC)
4
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
7.5
7
7.5
10
3.5
4.33
5.5
8.4
3
6
9
20
3) What is the firm’s profit/loss?
Profit = Total Revenue – Total Cost = P x Q – ATC x Q = 9 x 4 - 7.5 x 4 = 6
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
4
12
4
Marginal
Cost
(MC)
4
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
7.5
7
7.5
10
3.5
4.33
5.5
8.4
3
6
9
20
4) What is the break-even price?
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
4
12
4
Marginal
Cost
(MC)
4
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
7.5
7
7.5
10
3.5
4.33
5.5
8.4
3
6
9
20
4) What is the break-even price?
The break-even price equals to the minimum of ATC = $7
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
4
12
4
Marginal
Cost
(MC)
4
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
7.5
7
7.5
10
3.5
4.33
5.5
8.4
3
6
9
20
5) What is the shut-down price?
Cost Curves
Quantity
Total Cost Fixed Cost Variable
(TC)
(FC)
Cost (VC)
Average
TC
(ATC)
Average
VC
(AVC)
4
12
4
Marginal
Cost
(MC)
4
0
1
8
12
8
8
2
3
4
5
15
21
30
50
8
8
8
8
7
13
22
42
7.5
7
7.5
10
3.5
4.33
5.5
8.4
3
6
9
20
5) What is the shut-down price?
The shut-down price equals to the minimum of AVC = $3.5
Deriving the Market Supply Curve
Quantity
0
1
2
3
4
5
Firm A
MC
Firm B
MC
10
20
15
25
35
55
45
65
80
100
Derive the market supply curve
The Rise and Fall of Industries
Suppose that apple farming in the United States can be
represented by a competitive industry. Currently the industry is in
long run equilibrium.
Consider the case of cost-reducing technologies. For examples,
scientists develop new high-yield seeds that produce more apples
at a lower cost.
1) Explain how the industry would adjust to a decrease in cost of
production of apples.
2) Analyze what happens in the short run as well as in the long
run.