question
to find profit maximizing quantity
answer
find mc (derivative of c) then set P=MC and solve
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to find profit or loss
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π=TR-TC ((PxQ)-(c with q plugged in)) and solve; if negative, loss, if positive, profit
question
Does the P=MC guideline for profit maximization apply only to perfectly competitive firms?
answer
Yes because P=MC in a perfectly competitive world, but P does not equal MC in other market structures. The profit max guideline for all is MR=MC. Since in a perfectly competitive firm, P=MC, we can use P=MC as a guide for PC firms only
question
Does the MR=MC guideline for profit maximization apply only to perfectly competitive firms? Prove.
answer
No, MR=MC applies to all
question
Does P=AR apply only to perfectly competitive firms? Prove
answer
No, P=AR applies to all
question
Tax Problem: Find equilibrium values
answer
set Qd=Qs to find P, plug P into Qd or Qs to find Q
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Tax Problem: What price and quantity would prevail after the imposition of the tax? Identify the price for buyers and sellers. Illustrate.
answer
recall T=Pb-Ps (tax will be given) set Qd=Qs and use Pb=Ps+(tax) to solve - plug it into Pb in Qd equation. Once you have Ps, plug into Pb=Ps+(tax) to find Pb
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Tax Problem: Find deadweight loss and revenue
answer
Deadweight loss=1/2(b)(h) (height is tax). Revenue=A+D (height of the rectangle A and D create times the length (on X axis))
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Tax problem: Explain whether the tax could be justified despite the deadweight loss (situation-specific)
answer
Yes, while the deadweight loss represents/shows an inefficiency, taxing cigarettes may have important benefits to social welfare. There are health externalities that generate other costs (hospital bills, cost to society, secondhand smoke)
question
Government intervention problem: gov. raises price of milk above market equilibrium by imposing a high minimum price. Show the change in consumer surplus, the change in producer surplus, and the deadweight loss.
answer
Change in consumer surplus=-A-B, change in producer surplus=+A-C, and deadweight loss=B+C
question
at the profit maximizing level of output, what is true of total revenue (TR) and total cost (TC) curves?
answer
they must have the same slope (at profit maximizing level of output, MR=MC, so the slope of TC equals the slope of TR
question
assume that a profit maximizing monopolist is producing a quantity where marginal revenue exceeds marginal cost. We can conclude that the:
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firm's output is smaller than the profit maximizing quantity
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if a monopolist sets her output such that marginal revenue, marginal cost and average total costs are equal, economic profits must be:
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positive
question
if current output is less than profit maximizing output for a perfectly competitive firm, which must be true?
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marginal revenue is greater than marginal cost
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refer to the table. That the firm is perfectly competitive is evident from:
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constant marginal revenue
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refer to the figure. At P=80, the profit maximizing output in the short run is:
answer
39
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refer to the figure. At P=80, how much is profit in the short run?
answer
351. π=TR-TC =(80x39)-(71x39) =351
question
in an unregulated competitive market, producer surplus exists because:
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producers are willing to sell at less than equilibrium price
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in an unregulated competitive market, consumer surplus exists because:
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consumers are willing to pay more than equilibrium price
question
which of the following conditions must hold in the equilibrium of a competitive market where the government puts a specific tax on consumers?
answer
all of the above: the quantity sold and the price paid by the buyer must lie on the demand curve (Pb->Qd), the quantity sold and the sellers prices must lie on the supply curve (Ps->Qs), the quantity demanded must equal the quantity supplied (Qd=Qs at equilibrium), and the difference between the price the buyer pays and the price the seller receives must equal the specific tax (true)
question
Refer to the figure: suppose the market is currently in equilibrium. If the government establishes a price floor of $50, how many widgets would be sold?
answer
20
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Refer to the figure: Suppose the market is currently in equilibrium. If the government establishes a price floor of $40, consumer surplus will:
answer
fall by $350. Old CS=1/2(40)(40), new CS=1/2(30)(30) = 800-450=350
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Refer to the figure: If the government establishes a price floor of $40, and the government purchases the surplus over quantity demanded, producer surplus will:
answer
rise by $500. Ps=+A+B+D = (30)(10)+(10)(10)+1/2(10)(20)=300+100+100=500
question
Bonus: Using welfare analysis and the diagram below, explain whether there would be welfare gains if a market for kidneys was established:
answer
If no market: we lose. Amount of value of donation=A, amount of producer surplus=C, and amount of consumer surplus=B. Society would gain the value of A,B, and C given a market
question
In certain situations, Q2 is related to the:
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supply curve
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In certain Situations, Q3 is related to the:
answer
demand curve
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Scenario 1
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Q1 is produced
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Scenario 2
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Q2 is produced without support from the government; Producer produces according to supply, change in CS=-A-B, change in PS=+A-C-E, and no one buys up the excess (producer eats the cost)
question
Scenario 3
answer
Q2 is produced with support from the government, change in CS=-A-B, change in PS=+A+B+D; Cost to government=PS(Q2-Q1); Change in welfare=change in PS+change in CS-Cost to gove= D-(Q2-Q1)Ps
question
if demand is very inelastic relative to supply, the burden of tax falls mostly on:
answer
the buyers
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if the demand is very elastic relative to supply, the burden of tax falls mostly on:
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the sellers
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impact of a tax or subsidy example problem:
answer
are equal
question
slope of TR and slope of TC:
answer
looks different from demand and marginal revenue for a monopoly; In a competitive firm, when you sell one more unit of a product (MR), your change in revenue will come from or equal price (price=demand) P=MR; In a monopoly, P does not equal MR
question
demand and marginal revenue for a competitive firm:
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is both its average revenue curve and its marginal revenue curve; along this demand curve, marginal revenue, average revenue, and price are all equal
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the demand curve (d) curve facing an individual firm in a competitive market:
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if a firm is producing any output, it should produce at the level at which marginal revenue equals marginal cost
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output rule:
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is the portion of the marginal cost curve for which marginal cost is greater than average variable cost
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the firm's supply curve:
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the firm maximizes its profit by choosing the output at which price equals long-run marginal cost LMC; in the diagram, the firm increases its profit from ABCD to EFGD by increasing its output in the long run
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output choice in the long run:
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the point at which long-run marginal cost equals the price
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the long-run output of a profit-maximizing competitive firm is:
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profits are maximized when P=MC
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in perfect competition:
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total revenue - total cost
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Profit equals
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P=MC > AVC
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firm will produce positive output as long as:
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P=MC < AC
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firm will earn negative profit when:
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MC = AC
question
output that minimizes average cost is where:
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positive economic profits are being earned in the industry
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firms will enter as long as:
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a firm is earning a normal return on its investment-i.e., it is doing as well as it could by investing its money elswhere
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zero economic profit
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in a market with entry and exit, a firm enters when it can earn a positive long-run profit and exits when it faces the prospect of a long-run loss
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entry and exit:
answer
all firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded
question
long-run competitive equilibrium
answer
1: all firms in the industry are maximizing profit
2: No firm has an incentive either to enter or exit the industry because all firms are earning zero economic profit
3: The price of the product is such that the quantity supplied by the industry is equal to the quantity demanded by consumers
2: No firm has an incentive either to enter or exit the industry because all firms are earning zero economic profit
3: The price of the product is such that the quantity supplied by the industry is equal to the quantity demanded by consumers
question
a long-run competitive equilibrium occurs when three conditions hold:
answer
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