Econ Essay

660 words - 3 pages

Question 1a The table below illustrates the effect of price (P), on the quantity supplied (QS), quantity demanded (QD), and the resulting surplus (+), where demand is less than supply or shortage (-), where demand is more than supply. The derivation of the figures below is by taking the difference between the quantity supplied and the quantity demanded at various price levels.

Price $1.00 $1.10 $1.20 $1.30 $1.40 $1.50 $1.60 $1.70 $1.80 $1.90 $2.00 $2.10 $2.20 $2.30 $2.40 $2.50 $2.60 $2.70 $2.80 $2.90 $3.00 $3.10 $3.20 $3.30 $3.40 $3.50

Demanded (Qd) 60,000 58,000 56,000 54,000 52,000 50,000 48,000 46,000 44,000 42,000 40,000 38,000 36,000 34,000 32,000 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000

Supplied (Qs) 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 ...view middle of the document...

56239384 0.316286831

0.164350571 154.7560266 12

ANOVA df Regression Residual Total 2 9 11 SS 99711.4002 215544.8498 315256.25 MS 49855.7001 23949.42776 F 2.081707363 Significance F 0.180689432

Coefficients Intercept X Variable 1 X Variable 2 548.7114597 -5.557657119 0.021109299

Standard Error 152.2796242 3.221577751 0.015675403

t Stat 3.603315038 -1.725135182 1.346651116

P-value 0.005718645 0.118586792 0.211022102

Lower 95% 204.2310178 -12.84537229 -0.014350926

Upper 95% 893.1919016 1.730058051 0.056569525

Lower 95.0% 204.2310178 -12.84537229 -0.014350926

Upper 95.0% 893.1919016 1.730058051 0.056569525

The estimated parameters for the empirical cost function AVC = a + bQ + cQ^2 a= 548.71 b= -5.5577 c= 0.021109 AVC = a + bQ +cQ^2 = 548.71 – 5.5577Q + 0.021109Q^2

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Question 2c The level of output which AVC reaches it minimum value: Level of output = -(-5.5577)/(2(0.021109)) = 131.6429011

The minimum value of AVC at its minimum: AVC min = a + bQm + c(Qm)^2 Q = 131.6429011 AVC = 548.71 – 5.5577(131.6429)+ 0.021109(131.6429)^2 = 182.8941

Question 2d When price falls below minimum average variable cost, the firm will shut down in the short run. For this reason, minimum average variable cost is called the shut down price.

P < min AVC in the short run

The minimum average variable cost for Precision Engineering department is $182.89. Therefore, when the price is lower than $182.89, the company should shut down.

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