Ch 14 Problems and Applications 1 -6

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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 ……. . 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 199 39601 200 40000 201 40401 ATC x Q = TC 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 2 million 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 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 Q 6) : • LRE = zero economic profits

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