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Econ Essay

5448 words - 22 pages

Suggested Exercises’ Answers
(Please note that these questions are from “Problems and Applications” part of the chapters, which are at the very end of the chapters)
Q1. a. Profit is equal to (P – ATC) × Q. Therefore, profit is ($10 – $8) × 100 = $200.

b. For firms in perfect competition, marginal revenue and average revenue are equal. Since profit maximization also implies that marginal revenue is equal to marginal cost, marginal cost must be $10.

c. Average fixed cost is equal to AFC /Q which is $200/100 = $2. Since average variable cost is equal to average total cost minus average fixed cost, AVC = $8 - $2 = $6.

d. Since average total cost is less than marginal ...view middle of the document...

The equilibrium price rises from P1 to P2, but the price does not increase by as much as the increase in marginal cost for the firm. As a result, price is less than average total cost for the firm, so profits are negative.

In the long run, the negative profits lead some firms to exit the industry. As they do so, the industry-supply curve shifts to the left. This continues until the price rises to equal the minimum point on the firm's average-total-cost curve. The long-run equilibrium occurs with supply curve S3, equilibrium price P3, industry output Q3, and firm's output q3. Thus, in the long run, profits are zero again and there are fewer firms in the industry.

Q9. a. If firms are currently incurring losses, price must be less than average total cost. However, because firms in the industry are currently producing output, price must be greater than average variable cost. If firms are maximizing profits, price must be equal to marginal cost.

b. The present situation is depicted in Figure 6. The firm is currently producing q1 units of output at a price of P1.

Figure 6

c. Figure 6 also shows how the market will adjust in the long run. Because firms are incurring losses, there will be exit in this industry. This means that the market supply curve will shift to the left, increasing the price of the product. As the price rises, the remaining firms will increase quantity supplied. Exit will continue until price is equal to minimum average total cost. Average total cost will be lower in the long run than in the short run. The total quantity supplied in the market will fall.

Q11. a. The firms' variable cost (VC), total cost (TC), marginal cost (MC), and average total cost (ATC) are shown in the table below:


b. If the price is $10, each firm will produce five units, so there will be 5  100 = 500 units supplied in the market.

c. At a price of $10 and a quantity supplied of five, each firm is earning a positive profit because price is greater than average total cost. Thus, entry will occur and the price will fall. As price falls, quantity demanded will rise and the quantity supplied by each firm will fall.

d. Figure 8 shows the long-run industry supply curve, which will be horizontal at minimum average total cost.

Figure 8

Q13. a. Figure 10 illustrates the gold-mining industry and a representative gold mine (firm). The demand curve, D1, intersects the supply curve at industry quantity Q1 and price P1. Because the industry is in long-run equilibrium, the price equals the minimum point on the representative firm's average total cost curve, so the firm produces output q1 and makes zero profit.

b. The increase in jewelry demand leads to an increase in the demand for gold, shifting the demand curve to D2. In the short run, the price rises to P2, industry output rises to...

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