Download Problem Set - Amherst College

Amherst College
Department of Economics
Economics 111 – Section 3
Fall 2012
Wednesday, October 10: Short Run and Long Run
1.
Run the Short Run and Long Run simulation in our lab by clicking inside the red box.
{LabLink}
1a. Initially, the price of fish equals $5.00 per pound and 30 million pounds of fish are produced. On
a sheet of graph paper, draw the demand and supply curve for the fish market to illustrate this
equilibrium.
1b. Now, consider a typical fish firm. Draw a graph representing the typical firm immediately to the
right of the graph you drew to represent the fish market. What does the firm's marginal revenue
equal in this perfectly competitive industry? Draw the firm's marginal revenue curve. How much
output is the typical firm producing? Assuming that the firm is maximizing its profits, draw its
marginal cost curve.
1c. Next, consider the long run. To see if a long run equilibrium exists, click the "Next Period" button
a few times. If profits were positive, what would happen to the number of firms? Explain. If
profits were negative, what would happen to the number of firms? Explain. Consequently, what
must profits equal for the typical firm? Is the market for fish in long run equilibrium?
1d. In view of this, how are the price and the firm's average total cost related? On your graph, draw
the firm's average total cost curve. Keep in mind that the firm's average total cost curve is Ushaped and that it intersects the marginal cost curve at minimum average total cost.
2a. Click “Start Over”. Suppose that in period 1 the price of chicken rises from $1.00 per pound to
$1.25 and stays at $1.25 thereafter. To investigate this scenario, click 1.25 in the "Price of Chicken"
box. On your graph, illustrate how the increased price of chicken will affect the market demand
and/or supply curve for fish; that is, illustrate the new equilibrium price and quantity for period
1. Explain
2b. Now, consider the typical fish firm. Will the typical firm's marginal revenue, marginal cost,
and/or average total cost curves be affected? Explain. How much output is the typical firm now
producing? Illustrate these effects on your graph. How are the price and the firm's average total
cost related? What does this relationship imply about the sign of the firm's profit?
2c. To see what happens in period 2 click the "Next Period" button. What happens to the number of
firms in the industry? Explain. What happens to the market demand and/or supply curves?
Explain. What happens to the equilibrium price and quantity? Explain.
2d. Next, focus on the typical firm. Will the typical firm's marginal revenue, marginal cost, and/or
average total cost curves be affected? Explain. What happens to the typical firm's level of
production? Explain. Illustrate these effects on your graph.
2
NB: The following two questions are optional.
3a. Click “Start Over”. Suppose that instead of the price of chicken changing, the unit variable cost of
producing fish rises by $1.00 in period 1 and remains at that level thereafter. To investigate this
scenario, click 1.00 in the "Unit VC" box. This will cause both the marginal cost and average total
cost curves of the fish firm to shift up by $1.00. Reproduce the graph you drew to answer
question 1 and draw the firm's new marginal and average total cost curves. Illustrate how market
demand and/or supply curve for fish will be affected: that is, illustrate the new equilibrium price
and quantity for period 1.
3b. Now, consider the typical fish firm. Will the typical firm's marginal revenue, marginal cost,
and/or average total cost curves be affected? Explain. How much output is the typical firm now
producing? Illustrate these effects on your graph. How are the price and the firm's average total
cost related? What does this relationship imply about the sign of the firm's profit?
3c. To see what happens in period 2 click the "Next Period" button. What happens to the number of
firms in the industry? Explain. What happens to the market demand and/or supply curves?
Explain. What happens to the equilibrium price and quantity? Explain.
3d. Next, focus on the typical firm. Will the typical firm's marginal revenue, marginal cost, and/or
average total cost curves be affected? Explain. What happens to the typical firm's level of
production? Explain. Illustrate these effects on your graph.
4a. Click “Start Over”. Last, suppose that instead of a change in price of chicken or unit variable
costs, the firm's fixed costs rise by $12,000. To investigate this scenario, click 12000 in the "FC"
box. Reproduce the graph you drew to answer question 1. Has the equilibrium price and quantity
in period 1 been affected by the increase in fixed costs? Have the market demand and/or supply
curves been affected? Explain.
4b. Now, consider the typical fish firm. Will the typical firm's marginal revenue, marginal cost,
and/or average total cost curves be affected? Explain. How much output is the typical firm now
producing? Illustrate these effects on your graph. How are the price and the firm's average total
cost related? What does this relationship imply about the sign of the firm's profit?
4c. To see what happens in period 2 click the "Next Period" button. What happens to the number of
firms in the industry? Explain. What happens to the market demand and/or supply curves?
Explain. What happens to the equilibrium price and quantity? Explain.
4d. Next, focus on the typical firm. Will the typical firm's marginal revenue, marginal cost, and/or
average total cost curves be affected? Explain. What happens to the typical firm's level of
production? Explain. Illustrate these effects on your graph.