Download Microeconomics Wa 3

Microeconomics Wa 3
1. At its current level of production, a profit-maximizing firm in a competitive market receives
$12.50 for each unit it produces and faces an average total cost of $10. At the market price of
$12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output
level of 1000 units. What is the firm's current profit? What is likely to occur in this market, and
why?
Total
rev
|
12500|
Total
costs
|
10000|
TC=ATC(Q)
=
10
(
1000)
=
10000
Profit=TR-TC
=
12500
10000
=
2500
In this case, the profit is positive however for perfectly competitive markets in this situation,
there will be zero profits in the long-run. In this market, new firms will enter the market
because of the attraction to profits which will increase market supply and reduce equilibrium
price until it reaches close to P=$10, consequently leading to zero economic profits in long-run.
In the case where a lower price is forced, this firm will be pressed to reduce output some with
the new equilibrium P=MR=MC 2. In order to determine whether time is being spent optimally,
a commercial fisherman has recorded the following information over the past year: "hours
spent fishing" and "quantity of fish caught." What is the marginal product of fishing for hour
spent?
Hours/day|
1|
2|
3|
4|
5|
6|
Total
Quantity
of
Fish
(tons)|
10|
18|
24|
28|
30|
31|
Marginal
Product|
0|
0|
0|
10|
8|
6|
4|
2|
1|
3. The fisherman has a fixed cost of $200 per day and variable costs of $150 per hour (wages
and fuel). a. Fill in the information missing in the following table. Hours/ day| Total Fixed Costs|
Total Variable Costs| Total Costs| Marginal Costs| 0| 200| 0| 200| 0|
1|
2|
200|
200|
150|
300|
350|
500|
150|
150|
3|
200|
450|
650|
150|
4|
200|
600|
800|
150|
5|
200|
750|
950|
150|
6|
200|
900|
1100|
150|
b. The fish sell for $100 a ton. How many hours fishing per day he work in order to earn a
maximum profit on his day's activity? And how much is that profit? Please show all your
calculations.
Fixed
Costs
per
day
|
200|
Variable
Costs
per
hour|
150|
Total
Costs
|
(200)(150)(x)|
Selling
Price
|
100
a
ton|
Total
Costs/24
Hours
|
200+24(150)=3800
|
In this case, the number of hours of fishing required to reach a maximum profit is 5 hours. Once
the 5 hours have been exceeded, marginal revenue and profits are reduced as the marginal
costs exceed marginal revenue. Hours/Day| Total Costs| Marginal Costs | Total Revenue |
Marginal
Revenue
|
Profit|
0|
200|
0|
0|
0|
-200|
1|
2|
3|
4|
5|
6|
350|
500|
650|
800|
950|
1100|
150|
150|
150|
150|
150|
150|
1000|
1800|
2400|
2800|
3000|
3100|
1000|
800|
600|
400|
200|
100|
650|
1300|
1700|
2000|
2050|
2000|
4. Under what conditions should a firm shut down production in the short run? Under what
conditions should a firm shut down in the long run? Explain the difference between the short
and long run conditions. In the short run, firms shut down if the revenue that it would get from
producing is less than it’s variable costs of production. In the long run firms exit the market if
the revenue it would get from producing is less than it’s total costs. A shutdown is a reference
to a short run decision not to produce anything during a specific period of time because of
current market conditions. An exit is in reference to a long run decision to leave the market.
The difference between short and long run decisions because most firms cannot avoid their
fixed costs in the short run but may be able to do this in long run. Another difference is that a
firm that decides to shut down temporarily still has to pay it’s fixed costs and a firm that exits
the market does not have to pay fixed or variable costs. 5. Define and explain the relationship
between total revenue, average revenue, and marginal revenue for a monopolist. What is
monopoly profit? Should a monopolist produce quantities of product greater than that which
would maximize profits? A monopoly’s total revenue is equal to the quantity sold multiplied by
the price. Average revenue in a monopoly is amount of revenue the firm receives per unit sold.
Marginal revenue is defined as the amount of revenue that the firm receives for each additional
unit of input. A monopolist’s marginal revenue is always less than the price of it’s good. If a
monopoly firm wants to increase the amount sold, they must lower the price it charges to all
customers. Upon increasing the amount of goods sold, there are two affects on the total
revenue; more output is sold (output effect) and the price of each unit decreases (price effect).
When more output is sold total revenue tends to increase; when the price falls the total
revenue tends to increase. Monopoly profit is the total revenue minus total costs and always
exists. If excess profits are made by a monopolistic firm than it is an indication that the
company is not allocating it’s resources properly. A monopolist should not produce quantities
of product greater than that which would maximize profits. A monopolist firm should
determine the level of production according to the point of production at which marginal
revenue equals marginal cost. If marginal cost is greater than marginal revenue the firm can
increase profit by reducing production. If marginal cost is less than marginal revenue, they can
raise profit by increasing unit production. 6. In what ways can a government create a
monopoly? Why might a government do this? The government may create monopolies in
situations where they have given a single firm the exclusive right to sell a particular good or
service. Governments would do this in instances where they believe the situation would benefit
society as a whole, or to encourage growth in a certain market. One example is when a
pharmaceutical company discovers a new drug, it can apply for a government patent. If the
patent is granted, the firm has the exclusive right to produce and sell that drug for specified
period of time. The effects of such a government created monopolies are in plain sight. In the
case of the pharmaceutical company, the firm is able to charge higher prices for its patented
product and as a result, earn higher profits. With said higher profits, the firm has the ability to
complete further research in its quest for new and more advanced drugs. Another instance
where government would create a monopoly is when it is easier to run a monopoly itself rather
than regulate a private firm. One example of this would be the U.S. Postal Service
7. Explain the output effect and the price effect for an oligopoly. How does each influence the
oligopolist's
production
decision?
The output effect for an oligopoly would be when the price is above the marginal cost, selling
more at the same price will increase profits. The price effect for an oligopoly is the effect of
raising production will increase the total amount sold which results in a lower price and a lower
profit on all products sold. If the output effect is larger than the price effect, the firms will
increase production. If the price effect is larger than the output effect, the owner will not raise,
or even decrease production. Each player in a oligopoly will increase production until the
output and price effect are exactly balanced. 8. What is a natural monopoly? How does a
natural monopoly lead to lower costs than would exist if there were more than one firm in an
industry that is a natural monopoly? By definition, a natural monopoly is when a single firm can
supply a good or service to an entire market at a lower price than could two or more firms. A
natural monopoly occurs when it is discovered that it makes sense from an economic scale,
maximum efficiency and distribution standpoint if a single firm is the supplier/provider. In these
cases, if more firms were competing for power in a natural monopoly, it would result in both
having to continue to pay their fixed costs where as if one firm is the producer, this firm can
produce any amount of output at the least cost. A larger number of firms involved in the
natural monopoly means less output per firm and higher average total costs. 9. Entry of firms in
a monopolistically competitive industry is characterized by two "external" effects. What are
these effects and how do they affect a monopolistically competitive firm. How are consumers
and incumbent firms influenced by these externalities? Externalities of new entry of firms in a
monopolistically competitive industry are characterized by the product variety externality and
the business stealing externality. The product variety externality is when the entry of a new
firm conveys a positive externality on summers because some consumers receive consumer
surplus from the introduction of a new product in the industry. The business stealing externality
is when the entry of a new firm imposes a negative externality on existing firms because other
firms lose customers and profits due to the entry of a new competitor in the market. Due to
these externalities, a monopolistically competitive market can have too many or not enough
products at any given time, therefore raising or lowering surplus. Consumers view new firms
who enter the market as an advantage point, with new products or as a way to get similar
products at a lower price. Firms see entry into this market as profit especially if the market is
economically sound. 10. Does a monopolistic competitor produce more or less output as
compared to an efficient level of production? Explain. What are the benefits and drawbacks of
this? Should the government intervene to alter this? A monopolistic competitor produces less
output than an efficient level of production since it is produced at a quantity at which marginal
cost equals marginal revenue and then uses the demand curve to determine the price
consistent with this quantity. Providing an efficient level of production is achieved when a
product is created at its lowest average total cost. In most cases it is more profitable for a
monopolistic competitor to operate with excess capacity however prices normally exceed
marginal total cost because they have market power. Because they have a markup over
marginal cost, some products do not sell because consumers value the product at a lower price
thus causing deadweight losses. Government should not intervene because monopolistic
competitors are making zero profits already; requiring them to lower their prices to equal
marginal
cost
would
cause
them
to
make
losses.
References
1. Desai, Vandan Microeconomics . Chapter 15: Monopoly. Retrieved February 2012 from:
http://davidprudente.files.wordpress.com/2008/12/mankiw-monopoly-chapter-outline.pdf 2.
Riley, Geoff A2 Markets and Market Systems Retrieved February 2012 from:
http://tutor2u.net/economics/revision-notes/a2-micro-oligopoly-overview.html 3. Mankiw,
Gregory Principals of Economics 6th Edition Retrieved February 2012 from:
http://www.unm.edu/~parkman/M17.pdf 4. Lecture Notes Retrieved February 2012 from:
http://www.albany.edu/~aj4575/LectureNotes/Lecture30.pdf 5. Maniw, Gregory (G.W.)2009
Principles of Microeconomics 5e.Ohio.South-Western Cengage Learning 6. Monopolistic
Competition
Retrieved
February
2012
from:
http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=monopolistic+competition