Ch9 Review Ques-ons Haşmet Gökırmak Q2, p239) Ajax is a compe--ve firm opera-ng under the following condi-ons: Price of output is $5, the profit-­‐
maximizing level of output is 20,000 units units, and the total cost (full economic cost) of producing 20,000 units is $120,000. The firm’s only fixed factor of produc-on is a $300,000 stock of capital (a building). If the interest rate available on comparable risks is 10 percent, should this firm shut-­‐down immediately in the short run? Explain your answer. Q2, p239) The enterprise, Ajax, is suffering a $20,000 economic loss. TR = $100,000, P × q = $5 × 20,000, TC = $120,000. Fixed costs are $30,000 (10% annually on $300,000: the opportunity cost of capital). TVC = $90,000 (TC – TFC = 120,000 – 30,000). Thus, revenue covers variable cost and profit on opera-ons is 100,000 – 90,000 = 10,000. The firm should operate in the short run but exit in the long run. Q14-­‐A) Complete the following table for a single firm in the short run. Output TFC TVC 0 $0 $300 1 100 2 150 3 210 4 290 5 400 6 540 7 720 8 950 9 1,240 10 1,600 TC AVC ATC MC 14. (a) Output TFC TVC TC AVC ATC MC
0 $300
$0
$300 — — —
1 $300 $100 $400 $100.00 $400.00 $100
2 $300 $150 $450 $75.00 $225.00 $50
3 $300 $210 $510 $70.00 $170.00 $60
4 $300 $290 $590 $72.50 $147.50 $80
5 $300 $400 $700 $80.00 $140.00 $110
6 $300 $540 $840 $90.00 $140.00 $140
7 $300 $720 $1,020 $102.86 $145.71 $180
8 $300 $950 $1,250 $118.75 $156.25 $230
9 $300 $1,240$1,540 $137.78 $171.11 $290
10 $300 $1,600$1,900 $160.00 $190.00 $360
14B) Using the informa-on in the table, fill in the following supply schedule for this individual firm under perfect compe--on and indicate profit (posi-ve or nega-ve) at each output level. (Hint: At each hypothe-cal price, what is the MR of producing 1 more unit of output? Combine this with the MC of another unit to figure out the quan-ty supplied.) Price $50 70 100 130 170 220 280 350 Quan4ty Supplied Profit b) 14C) Now suppose there are 100 firms in this industry, all with iden-cal cost schedule. Fill in the market quan-ty supplied at each price in this market. Price Market Quan4ty Market Quan4ty Supplied $50 70 100 130 170 220 280 350 Demanded C) 14D) From the Market supply and demand schedules in c, the market quan-ty is ____ and the equilibrium market quan-ty is _____. Each firm will produce quan-ty of ____ and a profit/loss equal to _______. 14D) From the market supply and demand schedules given, the equilibrium market price for this good is $170 and the equilibrium market quan-ty is 600. Each firm will produce a quan-ty of 6 and earn a profit equal to $180. 14E) In d, your answer characterize the short-­‐run equilibrium in this market. Do they characterize the long-­‐
run equilibrium as well? If so, explain why. If not, explain why not (that is what would happen in the long-­‐run to change the equilibrium and why?). 14e) The equilibrium in this market is not a long-­‐run equilibrium. Because firms are making profits, entry will occur. Entry will increase quan-ty supplied, and this will decrease equilibrium price un-l each firm is making zero profit. Q15) Assume that you are hired as an analyst at a major New York consul-ng firm. Your first assignment is to do an industry analysis of the tribble industry. Aker extensive research and two all-­‐nighters, you have obtained the following informa-on: •  Long-­‐run costs: Capital costs: $5 per unit of output Labor costs: $2 per unit of output •  No economies or diseconomies of scale •  Industry currently earning a normal rate of return to capital (profit of zero) •  Industry perfectly compe--ve, with each of 100 firms producing the same amount of output •  Total industry output: 1.2 million tribbles Demand for tribbles is expected to grow rapidly over the next few years to a level twice as high as it is now, but (due to short-­‐run diminishing returns) each of the 100 exis-ng firms is likely to be producing only 50 percent more. a)  Sketch the long-­‐run cost curve of a representa-ve firm. b)  Show the current condi-ons by drawing two diagrams, one showing the the industry and one showing a representa-ve firm. c)  Sketch the increase in demand and show how the industry is likely to respond in the short-­‐run and in the long run. A and B c) In the short run, demand shiks from D to D', and price rises to P1. Firms are making profits, and they raise output to 18. In the long run, 100 new firms enter the industry. Supply shiks from S to S', and price falls back to $7. 1) New investors are not aoracted to an industry and current ones are not exi-ng the industry if firms in the industry are A) breaking even. B) earning an economic profit. C) suffering an economic loss. D) earning an accoun-ng profit. A) breaking even. Amy borrowed $20,000 from her parents to open a bagel shop. She pays her parents a 5% yearly return on the money they lent her. Her other yearly fixed costs equal $9,000. Her variable costs equal $30,000. In her first year, Amy sold 40,000 dozen at a price of $1.50 per dozen. 2) Amy's total fixed costs equal A) $1,000. B) $9,000. C) $10,000. D) $21,000. 3) Amy's total costs equal A) $39,000. B) $40,000. C) $50,000. D) $59,000. 4) Amy's profit is A) $0. B) $20,000. C) $30,000. D) $50,000. 2) Amy's total fixed costs equal C) $10,000. 3) Amy's total costs equal B) $40,000. 4) Amy's profit is B) $20,000. 5) The profit maximizing quan-ty of wheat is _ bushels. A)  6 B) 9 C) 12 D) 16 6) His average total cost will be A) $7. B) $9. C) $11. D) $15. 7) His average variable cost will be A)  $7. B) $9. C) $11. D) $15. 8) His revenue per bushel will be A) $7. B) $9. C) $11. D) $15. 5) C) 12 6)  C) $11. 7)  B) $9. 8)  D) $15. 9) In the $6-­‐$7 price range, the firm will A) shut down. B) con-nue to operate but at a loss. C) break even. D) earn a profit. B) con-nue to operate but at a loss. 10) The firm's ________ point is at a price of $6. A) profit maximizing B) break-­‐even C) shut down D) loss maximizing 10) C) shut down 11) Suppose demand for wheat is ini-ally D2. If consumer incomes decrease, then demand for wheat will shik to ________. This will ________ the equilibrium price of wheat, and individual profit maximizing firms will produce ________ bushels of wheat. A) D3; increase; 15 B) D1; increase; 10 C) D3; decrease; 7 D) D1; decrease; 0 11) D) D1; decrease; 0 12) A firm suffers losses if A) price exceeds average variable cost but is less than average total cost. B) price exceeds marginal cost. C) total revenue is greater than the total fixed cost of produc-on. D) total revenue is greater than the total variable cost of produc-on but less than total costs. 12) D) total revenue is greater than the total variable cost of produc-on but less than total costs. 13) A firm will shut down in the short run if A) it is suffering a loss. B) fixed costs exceed revenues. C) variable costs exceed revenues. D) total costs exceed revenues. 13) C) variable costs exceed revenues. 14) If a firm shuts down in the short run, then A) its economic profits are zero. B) its losses are equal to its fixed costs. C) its fixed costs are greater than its variable costs. D) it must be the case that its revenues from opera-ng were less than its total costs. 14) B) its losses are equal to its fixed costs. 15) When ________ scale of produc-on leads to ________ average costs, an industry exhibits decreasing returns to scale. A) decreased; higher B) increased; unchanging C) increased; higher D) increased; lower 15) C) increased; higher 16) The following is the set of condi-ons necessary for ________ for a perfectly compe--ve firm: P = SRMC = SRAC = LRAC. A) short-­‐run shut down B) long-­‐run profit C) long-­‐run produc-on with economic losses D) long-­‐run equilibrium D) long-­‐run equilibrium