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PROBLEMS
1.
Use Figure 6.5 to determine:
a.
How many 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?
Answers to parts a, b, and c are combined below.
(i)
5.
(ii)
At a price of $13, 4 baskets harvested resulting in a total profit is $8:
($13 x 4) – ($11 x 3) = 52 – 44 = 8.
(iii)
At a price of $9, 3 baskets harvested for total loss of $3: ($9 x 3) – ($10 x
3) = $27 – 3 = -3.
2.
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.
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
Price
ATC
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 $12 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 $8, what should the firm do?
a)
To answer this question, it is necessary to calculate the marginal
cost of production.
Output
10
11
12
13
14
15
16
17
18
19
(units):
Total
$50 $52 $56 $62 $70 $80 $92 $106 $122 $140
Cost:
Marginal
$2
$4
$6
$8 $10 $12 $14
$16
$18
Cost
b)
c)
Profits are maximized at the output level where MC=MR=P, thus,
at a price of $12 the firm should produce 16 units of output.
At a price of $12, producing an output of 16 units, the firm would
have $192 in revenue (16 x $12). The total cost is $92 at 16 units
of output, thus the firm would have $100 in profit.
If the market price dropped to $8, the firm should reduce its
output to 14 units of output where it will make a profit of $42.
4.
Graph the market behavior described in the Headline on page 144.
Price of
Wireless
Phones
S1
S2
P1
P2
D
Q1
5.
Q2
Q of Wireless
Phones
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?
(a)
$1
150,000
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.
e.
f.
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.
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.