Microeconomics with Connect Access Card
20th Edition
ISBN: 9781259278556
Author: Campbell McConnell
Publisher: McGraw-Hill Education
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Question
Chapter 11, Problem 5RQ
To determine
The mismatch between the marginal revenue and the marginal cost in the long run.
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Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect it to be in the long run? LO11.2 a. $0.25. b. $1.00. c. $1.25. d. $1.50.
Consider a set of 1000 companies operating in a competitive market. The supply curve for this market is given by O = 20+2P and the demand curve is given by D = 280-4P, where quantity Q is measured in millions of tons and Price P is measured in monetary units.
Considering that the marginal cost of the individual firm is given by 2Q, the quantity Q being measured in thousands of tons, we ask:
a) Sketch the market equilibrium and the equilibrium of an individual firm.
b) What is the situation of this market at that particular moment.
c) Make considerations about the long-run equilibrium trend of this market.
Use the accompanying graph to answer the questions that follow. (LO1, LO2) a. Suppose this monopolist is unregulated. (1) What price will the firm charge to maximize its profits? (2) What is the level of consumer surplus at this price? b. Suppose the firm’s price is regulated at $80. (1) What is the firm’s marginal revenue if it produces 7 units? (2) If the firm is able to cover its variable costs at the regulated price, how much output will the firm produce in the short run to maximize its profits? (3) In the long run, how much output will this firm produce if the price remains regulated at $80?
Chapter 11 Solutions
Microeconomics with Connect Access Card
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- Suppose that each firm in a competitive industry has the following costs: Total cost: TC = 50 + q2 Marginal cost: MC = q where q is an individual firms quantity produced. The market demand curve for this product is Demand:QD = 120 P where P is the price and Q is the total quantity of the good. Currently, there are 9 firms in the market. a. What is each firms fixed cost? What is its variable cost? Give the equation for average total cost. b. Graph average-total-cost curve and the marginal-cost curve for q from 5 to 15. At what quantity is average-total-cost curve at its minimum? What is marginal cost and average total cost at that quantity? c Give the equation for each firms supply curve. d. Give the equation for the market supply curve for the short run in which the number of firms is fixed. e. What is the equilibrium price and quantity for this market in the short run? f. In this equilibrium, how much does each firm produce? Calculate each firms profit or loss. Is there incentive for firms to enter or exit? g. In the long run with free entry and exit, what is the equilibrium price and quantity in this market? h. In this long-run equilibrium, how much does each firm produce? How many firms are in the market?arrow_forwardWhich of statement is true about economic profit in the long run.(LO2,3). a) both the monopolistic and perfect competitor make one. b) neither the monopolistic nor the perfect competitor makes one. c) only the perfect competitor makes one. d) only the monopolistic makes one.arrow_forward3. Suppose that fixed costs for a firm in the automobile industry (start-up costs of facto-ries, capital equipment, and so on) are $5 billion and that variable costs are equal to$17,000 per finished automobile. Because more firms increase competition in themarket, the market price falls as more firms enter an automobile market, or specifi-cally, P = 17,000 + (150/n), where n represents the number of firms in a market.Assume that the initial size of the U.S, and the European automobile markets are 300million and 533 million people, respectively.a. Calculate the equilibrium number of firms in the U.S. and European automobilemarkets without trade.b. What is the equilibrium price of automobiles in the United States and Europe if theautomobile industry is closed to foreign trade?c. Now suppose that the United States decides on free trade in automobiles withEurope. The trade agreement with the Europeans adds 533 million consumers tothe automobile market, in addition to the 300 million in the…arrow_forward
- 4. You are the manager of a firm that produces products X and Y at zero cost. Youknow that different types of consumers value your two products differently, but you are unable toidentify these consumers individually at the time of the sale. In particular, you know there arethree types of consumers (100 of each type) with the following valuations for the two products: Consumer Type Product X Product Y1 $90 $ 602 $70 $1403 $40 $160 a. What are your profits if you charge $40 for product X and $60 for product Y?b. What are your profits if you charge $90 for product X and $160 for product Y?c. What are your profits if you charge $150 for a bundle containing one unit of product X andone unit of product Y?d. What are your profits if you charge $210 for a bundle containing one unit of X and one unit ofY, but also sell the…arrow_forwardTwo firms with the same (constant) marginal costs are engaging in Bertrand competition. One of the companies exits the industry. As a aconsequence, the price for the other firm increases by 50%. What is the elasticity of demand in this market?O. 3O. 2O. 2.5O. 4arrow_forwardAssume that a purely competitive firm has the schedule of costs given in the table below. output TFC TVC TC 0 $500 $0 $500 1 500 150 650 2 500 200 700 3 500 260 760 4 500 340 840 5 500 450 950 6 500 590 1090 7 500 770 1270 8 500 1000 1500 9 500 1290 1790 10 500 1650 2150 Complete the table below to show the total revenue and total profit of the firm at each level of output the firm might produce. Assume market prices of $50, $150, and $250. Market price = $50 Market price = $150 Market price = $250 Output Total revenue Profit (+) or loss (−) Total revenue Profit (+) or loss (−) Total revenue Profit (+) or loss (−) 0 $_____ $_____ $_____ $_____ $_____ $_____ 1 _____ _____ _____ _____ _____ _____ 2 _____ _____ _____ _____ _____ _____ 3 _____ _____ _____ _____ _____ _____ 4 _____ _____ _____ _____…arrow_forward
- Suppose you are the economic adviser ofa company producing three brands of mobile pnones;Nokia 10, Samsung X and iPhone 7. Suppose further that, your company currently sells 120units of iPhone Z at e800 per unit, 150 units of Samsung X at e800 per unit and 200 units ofNokia 10 at e100 per unit, but in a bid to maximize profit, the company's managing directorproposes an increase in price of Samsung X from e800 to e1000 per unit for which quantitydemanded is anticipated to fall from 150 to 100 units; iPhone Z from e800 to e 1200 per unitfor which quantity demanded is anticipated to fall from 120 to 100 units; and Nokia 10 from100 to 200 per unit for which quantity demanded is expected to fall from 200 to 100 unitsUsing the mid-polint formula. compute the price elasticity of demand for each brand.From your answer in i, what is the type and economic interpretatiom of each brand'sii.value of elasticity.arrow_forwardLinda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Linda’s accounting profit is while her economic profit is. LO9.1 a. $700; $400 b. $300; $100 c. $300; negative $100 d. $1,000; negative $1,100arrow_forward1.Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case, justify your classification. LO1arrow_forward
- If there were 20 firms in this market the short run equilibrium would be $___ per pound. At this price firms in the industry would _____. Therefore in the long run firms would _____ the titanium market. Because you know that competitive firms earn ___ economic profit in the long run , you know the long run equilibrium Price must be $__ per pound. From each graph you can see that this means there will be __ firms operating in the titanium industry and long run equilibrium. True or false assuming implicit cost are positive each of the firms operating in industry in the long run earns negative accounting profit.arrow_forward4. You are the manager of a monopoly, and your demand and cost functions are given by P = 300 − 3Q and C(Q) = 1,500 + 2Q2, respectively. (LO3, LO4) a. What price–quantity combination maximizes your firm’s profits? b. Calculate the maximum profits. c. Is demand elastic, inelastic, or unit elastic at the profit-maximizing price–quantity combination? d. What price–quantity combination maximizes revenue? e. Calculate the maximum revenues. f. Is demand elastic, inelastic, or unit elastic at the revenue-maximizing price–quantity combination? 6. The accompanying diagram shows the demand, marginal revenue, and marginal cost of a monopolist. (LO1, LO3, LO5) a. Determine the profit-maximizing output and price. b. What price and output would prevail if this firm’s product were sold by price-taking firms in a perfectly competitive market? c. Calculate the deadweight loss of this monopoly. 8. The elasticity of demand for a firm’s product is –2.5 and its advertising elasticity of demand is 0.2.…arrow_forwardSuppose that the monthly market demand schedule for Frisbees is: Price $8 $7 $6 $5 $4 $3 $2 $1 Quantity Demanded 100 200 400 800 1,600 3,200 6,000 15,000 Suppose further that the marginal and average costs of Frisbee production for every competitive firm are Rate of Output 10 20 30 40 50 60 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 $5 per Frisbee. (a) How many Frisbees are being sold in equilibrium? (b) How many (identical) firms are initially producing Frisbees? (c) How much profit is the typical firm making? (d) 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…arrow_forward
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