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| Suppose that the potential customers for hair braiding in a city consider hair braiding to be identical and that the market is perfectly competitive. Hair braiding requires special skills so the supply of workers in this industry is upward-sloping, and the wages earned by hair braiders increase as the industry output increases. Firms in this market face the following total cost: TC = Q3 – 8Q2 + 20Q + W where Q is the number of hair braidings and W is the daily wage paid to workers. The wage, which depends on total industry output, equals W = 0.1NQ, where N is the number of firms. Market demand is QD = 500 – 20P. a. How does average total cost for the firm change as industry output increases? What does this relationship imply for industry’s long-run supply curve? b. Find the long-run equilibrium output for each firm. c. How does the long-run equilibrium price change as the number of firms increases? d. Find the long-run equilibrium number of firms and total industry output. e. Find the long-run equilibrium price. f. Suppose that demand increases to QD = 1,000 – 10P. Find the new long-run competitive equilibrium. Does this match your prediction about the long-run supply curve from part (a)? |
Suppose that the potential customers for hair braiding in a
Suppose that the identical firms in a perfectly competitive market
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| Suppose that the identical firms in a perfectly competitive market for cakes have long-run total cost functions given by TC(Q) = 10Q3 – 60Q2 + 100Q. Total cost is independent of the number of firms and total output in the market. a. Describe the long-run supply curve for this industry. b. Suppose market demand is QD = 1,000 – 40P. Solve for the long-run competitive equilibrium price, output per firm, and number of firms in the market. c. Suppose demand decreases to QD = 800 – 40P. Solve for the long-run competitive equilibrium price, output per firm, and number of firms in the market. |
Suppose that the market for auto detailing in a city
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| Suppose that the market for auto detailing in a city is perfectly competitive. The auto detailing firms are identical and have long-run cost functions given by TC(Q) = 10Q3 – 100Q2 + 300Q. Market demand is QD = 5,000 – 90P. a. Derive the marginal and average cost curves for a firm in this industry. b. Find the quantity at which average total cost is minimized for each firm. c. Find the long-run equilibrium price in this industry. d. Use market demand to find the equilibrium total industry output. e. Find the equilibrium number of firms. |
Minnie is one producer in the perfectly competitive pearl industry.
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| a. Find the area on the graph that illustrates the total revenue from selling 1,000 units at $100 each. b. Find the area on the graph that indicates the variable cost of producing those 1,000 units. c. Find the area on the graph that indicates the fixed cost of producing those 1,000 units. d. Add together the two areas you found in (b) and (c) to show the total cost of producing those 1,000 units. e. Subtract the total cost of producing those 1,000 units from the total revenue from selling those units to determine the firm’s profit. Show the profit as an area on the graph. |
Josie’s Pussycats sells ceramic kittens. The marginal cost of producing
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| Josie’s Pussycats sells ceramic kittens. The marginal cost of producing a particular kitten depends on how many kittens Josie produces, and is given by the formula MC = 0.8Q. Thus, the first kitten Josie produces has a marginal cost of $0.80, the second has a marginal cost of $1.60, and so on. Assume that the ceramic kitten industry is perfectly competitive, and Josie can sell as many kittens as she likes at the market price of $16. a. What is Josie’s marginal revenue from selling another kitten? (Express your answer as an equation.) b. Determine how many kittens Josie should produce if she wants to maximize profit. How much profit will she make at this output level? (Assume fixed costs are zero. It may to draw a graph of Josie’s marginal revenue and marginal cost.) c. Suppose Josie is producing the quantity you found in (b). If she decides to produce one extra kitten, what will her profit be? d. How does your answer to part (c) explain why “bigger is not always better”? |
The diagram on the right depicts the revenues and costs
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| a. What will the firm’s profit be if it decides to produce 20 units of output? 120 units? b. Suppose the firm is producing 70 units of output and decides to cut output to 60. What will happen to the firm’s profit as a result? c. Suppose the firm is producing 70 units of output and decides to increase output to 80. What will happen to the firm’s profit as a result? d. At an output level of 70, draw a line tangent to the total cost curve. Does your line look similar to the total revenue curve? What does the slope of the total revenue curve indicate? What does the slope of the total cost curve indicate? |
Assume that the ice cream industry is perfectly competitive. Each
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| Assume that the ice cream industry is perfectly competitive. Each firm producing ice cream must hire an operations manager. There are only 50 operations managers that display extraordinary talent for producing ice cream; there is a potentially unlimited supply of operations managers with average talent. Operations managers are all paid $200,000 per year. • The long-run total cost (in thousands of dollars) faced by firms that hire operations managers with exceptional talent is given by LTCE = 200 + Q2, where Q is measured in thousands of gallon tubs of ice cream. The corresponding marginal cost function is given by LMCE = 2Q, and the corresponding long-run average total cost is LATCE = 200/Q + Q. • The long-run total cost faced by firms that hire operations managers with average talent is given by LTCA = 200 + 2Q2. The associated marginal cost function is given by LMCA = 4Q, and the corresponding long-run average total cost is LATCA = 200/Q + 2Q. a. Derive the firm supply curve for ice cream producers with extraordinary operations managers. b. Derive the firm supply curve for ice cream producers with average operations managers. c. The minimum LATCA (for firms with average operations managers) is $40, achieved when those firms produce 10 units of output. The minimum LATCE (for firms with exceptional operations managers) is $28.28, achieved when those firms produce 14 units of output. Explain why, given only that information, it is not possible to determine the long-run equilibrium price of 5-gallon tubs of ice cream. d. Referring to part (c), suppose that you know that the market demand for ice cream is given by Qd = 8,000 – 100P. Explain why, in the long run, that demand will not be filled solely by firms with extraordinary managers. e. In part (d), you explained why the supply side of the market will consist of both firms with extraordinary managers and firms with average managers. What will the long-run equilibrium price of ice cream be? f. At the price you determined in part (e), all 50 firms with extraordinary managers will find remaining in the industry worthwhile. How many firms with average managers will also remain in the industry? g. At the price you determined in part (e), how much profit will a firm with an average manager earn? h. At the price you determined in part (e), how much profit will a firm with an extraordinary manager earn? How much economic rent will that talented manager generate for her firm? |
The graph below depicts the market for aloe vera gel.
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| a. Are the firms in the industry earning economic profits or losses? How can you tell? b. The condition you indicated in (a) will result in entry or exit from the aloe vera gel industry. Indicate whether we will see entry or exit, and depict the effects of that movement in the diagram for the industry. c. As a result of this change in the market, the price will change. Depict the effects of the price change on the representative firm in the right-hand panel. d. At what price will entry/exit stop? Briefly explain why. |
Suppose that the market for eggs is initially in long-run
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| Suppose that the market for eggs is initially in long-run equilibrium. One day, enterprising and profit-hungry egg farmer Atkins has the inspiration to fit his laying hens with rose-colored contact lenses. His inspiration is true genius-overnight his egg production rises and his costs fall. a. Will farmer Atkins be able to leverage his inspiration into greater profit in the short run? Why? b. Farmer Atkin’s right-hand man, Abner, accidentally leaks news of the boss’ inspiration at the local bar and grill. The next thing Farmer Atkins knows, he’s being interviewed by Brian Williams for the NBC evening news. What short-run adjustments do you expect competing egg farmers to make as a result of this broadcast? What will happen to the profits of egg farms? c. In the long run, what will happen to the price of eggs? What will happen to the profits of egg producers (including those of Farmer Atkins)? d. Explain how, in the long run, competition coupled with the quest for profits ends up making producers better off only for a little while, but consumers better off forever. |
Suppose that the restaurant industry is perfectly competitive. All producers
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| Suppose that the restaurant industry is perfectly competitive. All producers have identical cost curves, and the industry is currently in long-run equilibrium, with each producer producing at its minimum long-run average total cost of $8. a. If there is a sudden increase in demand for restaurant meals, what will happen to the price of restaurant meals? How will individual firms respond to the change in price? Will there be entry into or exit from the industry? Explain. b. In the market as a whole, will the change in the equilibrium quantity be greater in the short run or the long run? Explain. c. Will the change in output on the part of individual firms be greater in the short run or the long run? Explain and reconcile your answer with your answer to part (b). |
