5. Moving from short-run to long-run equilibrium Suppose the competitive market for cat toys is in short-run equilibrium. The following graph on the left shows the demand and short-run supply for cat toys. Assume every firm in this industry is identical. The graph on the right shows the marginal cost (MC) and average cost (AC) curves for each firm in the long run. PRICE (Dollars per cat toy) 10 9 8 1 0 Short-Run Market Supply Demand H 0 10 20 30 40 50 60 70 80 90 100 QUANTITY (Thousands of cat toys per year) (?) COST (Dollars per cat toy) 10 9 8 1 0 0 MC Individual Firm AC 1 2 3 4 5 6 7 8 9 OUTPUT (Hundreds of cat toys per year) 10 ? image 1

5. Moving from short-run to long-run equilibrium Suppose the competitive market for cat toys is in short-run equilibrium. The following graph on the left shows the demand and short-run supply for cat toys. Assume every firm in this industry is identical. The graph on the right shows the marginal cost (MC) and average cost (AC) curves for each firm in the long run. PRICE (Dollars per cat toy) 10 9 8 1 0 Short-Run Market Supply Demand H 0 10 20 30 40 50 60 70 80 90 100 QUANTITY (Thousands of cat toys per year) (?) COST (Dollars per cat toy) 10 9 8 1 0 0 MC Individual Firm AC 1 2 3 4 5 6 7 8 9 OUTPUT (Hundreds of cat toys per year) 10 ? image 1

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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6. Deriving the short-run supply curve The following graph plots the marginal cost (MC) curve, average total cost (ATC) curve, and average variable cost (AVC) curve for a firm operating in the competitive market for sun lamps. 100 90 80 70 60 50 ATC 40 30 20 10 0 0 5 AVC MOD 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of lamps) For every price level given in the following table, use the graph to determine the profit-maximizing quantity of lamps for the firm. Further, select whether the firm will choose to produce, shut down, or be indifferent between the two in the short run. (Assume that when price exactly equals average variable cost, the firm is indifferent between producing zero lamps and the profit-maximizing quantity of lamps.) Lastly, determine whether the firm will earn a profit, incur a loss, or break even at each price. Price (Dollars per lamp) 10 20 32 40 50 60 Quantity (Lamps) Produce or Shut Down? Profit or Loss? On the following graph, use the orange points (square…
1. Assume you have a perfectly competitive market with two types of firms. The only difference between the two types of firms is that the minimum average cost at which firms of type A can produce is lower than the minimum average cost at which firms of type B can produce. a. Give a graphical example of what the individual long run supply functions of a type A firm and a type B firm may look like. Explain the shape in detail. b. Based on your example, what will the aggregate supply curve of a market with 2 firms, one type A and one type B, look like? Explain the shape in detail. C. Assume now that all potential firms are identical. Evaluate the impact of a demand shock on the long run equilibrium market price and firm numbers. You must use graphical analysis and explain in detail.
3. Profit maximization in the cost-curve diagram Suppose that the market for frying pans is a competitive market. The following graph shows the daily cost curves of a firm operating in this market Hint: After placing the rectangle on the graph, you can select an endpoint to see the coordinates of that point. 100 90 Profit or Loss 80 70 ATC 60 50 40 30 AVC 20 MC 10 5 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of pans per day) In the short run, at a market price of $50 per pan, this firm will choose to produce 37,500 pans per day. PRICE (Dollars perpan)
11. Problems and Applications Q11 Suppose that each firm in a competitive industry has the following costs: Total Cost: TC = 50 + q? Marginal Cost: MC = q where q is an individual firm's quantity produced. The market demand curve for this product is: Demand Qp = 120 – P where P is the price and Q is the total quantity of the good. Each firm's fixed cost is $ What is each firm's variable cost? 50 + 9
Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 20 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 30 firms. PRICE (Dollars per pound) 80 72 64 56 48 40 32 24 16 8 0 0 120 240 360 480 600 720 840 960 1080 1200 QUANTITY (Thousands of pounds) Because you know that competitive firms earn $ Demand Supply (10 firms) True Supply (20 firms) If there were 20 firms in this market, the short-run equilibrium price of rhenium would be $ would Therefore, in the long run, firms would O False Supply (30 firms) per pound. From the graph, you can see that this means there will be ? per pound. At that price,…
2. Consider a competitive market where there are two types of firms, Type A and Type B, with total cost functions TC(q) = 2+4q+q² TCB (q) = 8+4q+6q² (a) Derive the short-run supply curve for each firm type (b) What is the short-run market supply, if there are 6 Type A firms, and 12 Type B firms? What is total quantity produced when p=10? (d) How does your answer at (c) change if we consider long run supply rather than short run? Here, assume again that p=10 and that there are 6 Type A firms and 12 Type B firms.
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11. The graph below shows the marginal revenue, marginal cost, and average total cost at different quantities for a firm in a perfectly competitive market. If this firm chooses to produce no output in the short run, what must the market price be? A-Below $20 $21-$30 $31-$40 $41-$50 Above $50 7. firm's implicit costs are $10,000, explicit costs are $5,000, and its total revenue is $10,000. This firm is earning A-normal accounting profit B-positive accounting profit of $5,000 C-positive economic profit of $5,000 D-normal economic profit E-negative accounting profit of $5,000
6. Deriving the short-run supply curve Consider the competitive market for dress shirts. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry. COSTS (Dollars) PRICE (Dollars per shirt) 100 90 80 70 60 50 100 40 90 10 80 0 70 Price (Dollars per shirt) 60 50 20 10 0 0 For each price in the following table, use the graph to determine the number of shirts this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero shirts and the profit- maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price. 15 20 25 55 70 85 10 0 0 0 MC D ATC On the following graph, use the orange points (square symbol) to plot points along the…
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Identification. Answer the following questions below. QUESTIONS: 1.) What are the ways to cut firm's production costs? 2.) What determines the firm's market power or competitive advantage? 3.) Graphically, in a purely competitive market, demand is equal to what? 4.) Using curves, graphically, a firm will shutdown if what? 5.) What is an output at which the firm makes a normal profit but noteconomic profit?