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PROBLEMS 1. Use Figure 6.5 to determine: a. How many baskets of fish should be harvested at market prices of i. $17 ii. $13 iii. $9 b. How much total revenue is collected at each price? c. How much profit does the farmer make at each of these prices? LO: 3 AACSB: Analytic (a) (b) (c) (d) 2. LO: 4 (i) (ii) (iii) (i) (ii) (iii) (i) (ii) (iii) BT: Application 5 baskets of fish. 4 baskets of fish. 3 baskets of fish. Total revenue = P x Q = $17 x 5 = $85. Total revenue = P x Q = $13 x 4 = $52. Total revenue = P x Q = $9 x 3 = $27. Total profit = Total revenue – Total cost = $85 - $61 = $24. Total profit = Total revenue – Total cost = $52 - $44 = $8. Total profit = Total revenue – Total cost = $27 - $39 = -$12. Suppose the typical catfish farmer was incurring an economic loss at the prevailing price p1. What forces would raise the price? What price would prevail in long-term equilibrium? Illustrate your answers with separate graphs for the catfish market and the typical farmer. AACSB: Analytic BT: Application Some catfish farmers will drop out of the market and the market supply will shift to the left. The result will be higher prices. In the long-term equilibrium position, the prevailing price will be that which equals the level of minimum average total costs. Graph (a) shows the increase in price from p1 to p2 as catfish farmers leave the market. Graph (b) shows the impact on the typical farmer as prices rise from p1 to p2. Economic losses become zero economic profits. MC ATC Price P2 P1 Quantity 3. Suppose a firm has the following costs: Output (units): 10 11 12 13 14 15 16 17 18 19 Total Cost: $50 $52 $56 $62 $70 $80 $92 $106 $122 $140 a) If the prevailing market price is $14 per unit, how much should the firm produce? b) How much profit will it earn at that output rate? c) If the market price dropped to $10, what should the firm do? LO: 3 AACSB: Analytic a) To answer this question, it is necessary to calculate the marginal cost of production. Output (units): Total Cost: Margina l Cost b) c) 4. BT: Application 10 11 12 $5 0 $5 2 $2 $56 $62 $70 $80 $92 $106 $122 $140 $4 13 $6 14 $8 15 $10 16 $12 17 $14 18 $16 19 $18 Profits are maximized at the output level where MC=MR=P, thus, at a price of $14 the firm should produce 17 units of output. At a price of $14, producing an output of 17 units, the firm would have $238 in revenue (17 x $14). The total cost is $106 at 17 units of output, thus the firm would have $132 in profit. If the market price dropped to $10, the firm should reduce its output to 15 units of output where it will make a profit of $70. Graph the market behavior described in the Headline on p. 144. AACSB: Analytic Price per Flat Screen LO: 5 BT: Application S1 S2 P1 P2 D Q1 5. Q2 Q of Flat Screen TVs Suppose that the monthly market demand schedule for Frisbees is: Price Quantity Demanded $8 1,000 $7 2,000 $6 4,000 $5 8,000 $4 16,000 $3 32,000 $2 64,000 Suppose further that the marginal and average costs of Frisbee production for every competitive firm are Rate of Output 100 200 300 400 500 600 Marginal Cost $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 Average Cost 2.00 2.50 3.00 3.50 4.00 4.50 Finally, assume that the equilibrium market price is $6 per Frisbee. a. Draw the cost curves of the typical firm and identify its profit maximizing rate of output and its total profits. b. Draw the market demand curve and identify market equilibrium. c. How many Frisbees are being sold in equilibrium? d. How many (identical) firms are initially producing Frisbees? e. How much profit is the typical firm making? f. In view of the profits being made, more firms will want to get into Frisbee production. In the long run, these new firms will shift the market supply curve to the right and push the price down to average total cost, thereby eliminating profits. At what equilibrium price are all profits eliminated? How many firms will be producing Frisbees at this price? $1 150,000 LO: 4,5 AACSB: Analytic BT: Application (a) Cost Curves 8 Cost Per Unit 7 MC 6 5 ATC 4 3 2 1 0 0 100 200 300 400 500 600 700 Quantity If the market price is $6, then each individual profit maximizing firm would produce an output of 500 units where MC= MR=P. Total profits are $1,000: ($6 - $4) x 500. b. Price per Unit Market Demand 9 8 7 6 5 4 3 2 1 0 A 0 20000 40000 60000 80000 100000 120000 140000 160000 Quantity c. d. At $6 per Frisbee, market equilibrium is 4,000 units. Since there is an equilibrium quantity sold of 4,000, there is room for eight firms who are each producing 500 Frisbees. e. f. Profits of a typical firm are $1,000. Selling 500 Frisbees at $6 each generates total revenue of $3,000. The total cost of producing 500 Frisbees at $4 each is $2000. The long run price equals the minimum ATC, $2 in this case, at which point economic profits will equal zero. At this price, 64,000 units are demanded and individual firms will produce only 100 units. Thus there will be 640 firms in the industry in the long run.