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| The canola oil industry is perfectly competitive. Every producer has the following long-run total cost function: LTC = 2Q3 – 15Q2 + 40Q, where Q is measured in tons of canola oil. The corresponding marginal cost function is given by LMC = 6Q2 – 30Q + 40. a. Calculate and graph the long-run average total cost of producing canola oil that each firm faces for values of Q from 1 to 10. b. What will the long-run equilibrium price of canola oil be? c. How many units of canola oil will each firm produce in the long run? d. Suppose that the market demand for canola oil is given by Q = 999 – 0.25P. At the long-run equilibrium price, how many tons of canola oil will consumers demand? e. Given your answer to (d), how many firms will exist when the industry is in long-run equilibrium? |
The canola oil industry is perfectly competitive. Every producer has
Martha is one producer in the perfectly competitive jelly industry.
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| Martha is one producer in the perfectly competitive jelly industry. Last year, Martha and all of her competitors found themselves earning economic profits. a. If entry and exit from the jelly industry are free, what do you expect to happen to the number of suppliers in the industry in the long run? b. Because of the entry/exit you described in part (a), what do you expect to happen to the industry supply of jelly? Explain. c. As a result of the supply change you described in part (b), what do you expect to happen to the price of jelly? Why? d. As a result of the price change you indicated in part (c), how will Martha adjust her output? |
For the past nine months, Iliana has been producing artisanal
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| For the past nine months, Iliana has been producing artisanal ice creams from her small shop in Chicago. She’s been just breaking even (earning zero economic profit) that entire time. This morning, the state Board of Health informed her that they are doubling the annual fee for the dairy license she operates under, retroactive to the beginning of her operations. a. In the short run, how will this fee increase affect Iliana’s output level? Her profit? b. In the long run, how will this fee increase affect Iliana’s output level? c. Suppose that instead of doubling the annual fee for a license, the state Board of Health required Iliana to treat every pint of ice cream to prevent the growth of bacteria. How would this stipulation affect Iliana’s production decision and profit in both the short and long run? |
The graphs below depict supply curves for John, Paul, and
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| The graphs below depict supply curves for John, Paul, and George, who are three producers in the perfectly competitive songwriting industry. a. If the price of songs is $1,000, how many songs will John write? Paul? George? The three combined? b. If the price of songs is $2,000, how many songs will John write? Paul? George? The three combined? c. If the price of songs is $3,000, how many songs will John write? Paul? George? The three combined? d. Assume that John, Paul, and George are the only three producers in the industry. Using your answers to (a-c), graph the short-run industry supply curve. |
Consider the graph on the right, which depicts the cost
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| a. To maximize profit, how many pounds of potatoes should this seller produce? Suppose that the potato grower’s bank ratchets up the interest rate applicable to the grower’s adjustable-rate mortgage loan. This increases the size of the potato grower’s monthly mortgage payment. b. Illustrate the change in the mortgage payment by shifting the appropriate cost curves. c. Which curves shift? Which do not? Why? d. How does the change in interest rates affect the grower’s decision on how many potatoes to produce? e. What happens to the potato grower’s profit as a result of the increased interest rate? f. How does the change in interest rates affect the shape and/or position of the grower’s short-run supply curve? |
Marty sells flux capacitors in a perfectly competitive market. His
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| Marty sells flux capacitors in a perfectly competitive market. His marginal cost is given by MC = Q. Thus, the first capacitor Marty produces has a marginal cost of $1, the second has a marginal cost of $2, and so on. a. Draw a diagram showing the marginal cost of each unit that Marty produces. b. If flux capacitors sell for $2, determine the profit-maximizing quantity for Marty to produce. c. Repeat part (b) for $3, $4, and $5. d. The supply curve for a firm traces out the quantity that firm will produce and offer for sale at various prices. Assuming that the firm chooses the quantity that maximizes its profits [you solved for these in (b) and (c)], draw another diagram showing the supply curve for Marty’s flux capacitors. e. Compare the two diagrams you have drawn. What can you say about the supply curve for a competitive firm? |
Consider the diagram on the right that depicts the cost
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| a. The owner of the firm finds that marginal cost and marginal revenue are equal at 11 units of output. If the owner produces 11 units, what will his profit or loss be? b. Suppose instead that the owner decides to produce nothing-he idles the production line and cuts his variable costs to zero. What will his profit or loss be? c. If the price is $7, is it better for the firm to produce 11 units, or nothing at all? What if the price is $9? |
Nancy sells beeswax in a perfectly competitive market for $50
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| a. If Nancy is interested in maximizing her total revenue, how many pounds of beeswax should she produce? b. What quantity of beeswax should Nancy produce in order to maximize her profit? c. At the profit-maximizing level of output, how do marginal revenue and marginal cost compare? d. Suppose that Nancy’s fixed cost suddenly rises to $30. How should Nancy alter her production to account for this sudden increase in cost? e. Suppose that the bee’s union bargains for higher wages, making the marginal cost of producing beeswax rise by $8 at every level of output. How should Nancy alter her production to account for this sudden increase in cost? |
A firm has a production function given by Q =
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| A firm has a production function given by Q = 10K0.25L0.25. Suppose that each unit of capital costs R and each unit of labor costs W. a. Derive the long-run demands for capital and labor. b. Derive the total cost curve for this firm. c. Derive the long-run average and marginal cost curves. d. How do marginal and average costs change with increases in output? Explain. e. Confirm that the value of the Lagrange multiplier you get from the cost-minimization problem in part (a) is equal to the marginal cost curve you found in part (c). |
Philo T. Farmsworth is a corn farmer with a 40-acre
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| Philo T. Farmsworth is a corn farmer with a 40-acre tract of land. Each acre can produce 100 bushels of corn. The cost of planting the tract in corn is $20,000, and the cost of harvesting the corn is $10,000. In May, when corn is selling for $10 per bushel, Philo plants his crop. In September the price of corn has fallen to $2 per bushel. What should Philo do? Explain, assuming that there are no costs involved with bringing the corn to market to sell. |
