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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”? |
Josie’s Pussycats sells ceramic kittens. The marginal cost of producing
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). |
The canola oil industry is perfectly competitive. Every producer has
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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? |
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. |
