EC102EconomicsB Class5
Week6/MT 05.11.2015
SamiraBarzin
[email protected]
samirabarzin.jimdo.com
OfficeHoursEC102:Mon10:30–11.30
(32L1.30)
EC102
Class5:Q1&Q2
SamiraBarzin
TopicofQ1&Q2:UnderlyingAssumpRonsofPerfectCompeRRon
Buyers •  infiniteamountofbuyers(eachbuyerhasnoindividualimpactonthemarket)
•  price-takers(buyerscandecidethequanRtytheybuy,butnotthemarket
price)
Sellers
•  infiniteamountofsellers(eachsellerhasnoindividualimpactonthemarket
•  price-takers(sellerscandecidethequanRtytheysupply,buttheycannot
influencethepriceoftheirintermediateinputsnorthepriceofthefinal
product)
•  non-strategicbehaviour(sellersdonottakethe(re)acRonsoftheothersellers
onthemarketintoaccountwhenmakingdecisions,thisisduetotherelaRvely
smallmarketshareeachfirmhasinamarketwithinfinitesellers)
Products
•  productsarehomogenous(productsareexactlyinterchangable,buyersarenot
abletodifferenRatebetweenthem)
MarketEntry
•  free/nobarrierstomarketentry(sellerscanatanyRmeenter/leavethe
market)
EC102
Class5:Q1
SamiraBarzin
ApricetakingfirmchoosesitsacRonsunderthe
assumpRonthat:
a)  itcannotinfluencethepricesoftheoutput
b)  Itcannotinfluencethepricesoftheinput
c)  itcannotinfluencethepricesoftheoutputthat
itsellsbutcaninfluencethepricesoftheinputs
thatitbuys
d)  itcaninfluencethepricesoftheoutputthatit
sellsbutcannotinfluencethepricesofthe
inputsthatitbuys
EC102
Class5:Q1
SamiraBarzin
ApricetakingfirmchoosesitsacRonsunderthe
assumpRonthat:
a)  itcannotinfluencethepricesoftheoutput✔
b)  Itcannotinfluencethepricesoftheinput✔
c)  itcannotinfluencethepricesoftheoutputthat
itsellsbutcaninfluencethepricesoftheinputs
thatitbuys✖
d)  itcaninfluencethepricesoftheoutputthatit
sellsbutcannotinfluencethepricesofthe
inputsthatitbuys✖
EC102
Class5:Q2
SamiraBarzin
ThecarindustrydoesnotfitthecondiRonsofa
perfectlycompeRRvemarketstructure
because:
a)  productsarehomogeneous
b)  therearealotofproducers
c)  producersareprice-takers
d)  producersbehavestrategically
EC102
Class5:Q2
SamiraBarzin
ThecarindustrydoesnotfitthecondiRonsofa
perfectlycompeRRvemarketstructure
because:
a)  productsarehomogeneous✖
b)  therearealotofproducers✖
c)  producersareprice-takers✖
d)  producersbehavestrategically✔
EC102
Class5:Q3
SamiraBarzin
Theshutdownruleimpliesthataprice-taking
firmisbe`eroffdisconRnuingitsoperaRonsif
foralloutputlevels:
a)  Marginalrevenueisbelowtotalcost
b)  Marginalcostisbelowmarginalrevenue
c)  Averagecostisbelowaveragerevenue
d)  Averagerevenueisbelowaveragecost
e)  Theconsumers’willingnesstopayisbelow
theaveragecost
EC102
Class5:Q3
€
AC
AR=MR=p=D
quanRty
SamiraBarzin
TheShutdownRule
Ifforallandanyoutputq
averagecosts(AC)outweight
averagerevenues,thenthe
firmwouldbegeneraRngaloss
foranyoutputproducedand
wouldbebe`eroffnot
producingatall(=shueng
downitsoperaRons).
Theshutdownruledetermines
whetherornotafirmshould
produceatall.
Shutdownif:AC>ARforallq
(inPerfectCompeRRonthisis
equivalentto:AC>pforallq)
EC102
Class5:Q3
MC=MR
p
q*
Total
revenues
SamiraBarzin
ProfitMaximisaRon/MarginalOutputRule
GiventhatAC>AR(sothatthefirmproduces),
MC thefirmwillproduceatthepointwheretheMC
andMRcurvesintersect.AslongasMR>MC(to
theleioftheintersecRonpoint),witheach
extraunitproduced,thefirmissRllisgeneraRng
morerevenuesthanitcoststoproducethat
unit,sothereisanincenRvetoproducefurther.
TotherightoftheintersecRonpointwhere
AR=MR=p=D MR<MC,itcostsmoretoproduceanextraunit
thattherevenuesthatunitgenerate,sothatthe
firmwouldnotwanttoproducethisunit.
MC=MRistheonlyequilibriumwithoutan
incenRvetodeviate.
UnderperfectcompeRRonthiscanalsobe
wri`enasMC=p.
quanRty
€
EC102
Class5:Q3
SamiraBarzin
Theshutdownruleimpliesthataprice-taking
firmisbe`eroffdisconRnuingitsoperaRonsif
foralloutputlevels:
a)  Marginalrevenueisbelowtotalcost✖
b)  Marginalcostisbelowmarginalrevenue✖
c)  Averagecostisbelowaveragerevenue✖
d)  Averagerevenueisbelowaveragecost✔
e)  Theconsumers’willingnesstopayisbelow
theaveragecost✔
EC102
Class5:Q4
SamiraBarzin
Aprice-takingfirm‘slong-runsupplycurvecoincides
with:
a)  itslong-runmarginalcostcurvebelowitslongrunaveragecostcurve
b)  itslong-runaveragecostcurveaboveitslong-run
marginalcostcurve
c)  itslong-runaveragecostcurvebelowitslong-run
marginalcostcurve
d)  itslong-runmarginalcostcurveaboveitslongrunaveragecost-curve
EC102
SamiraBarzin
Class5:Q4
Thesupplycurveofa
compeRRvefirmis
determinedbyboththe
shutdownandmarginal
outputrule:Atanypoint p
whereAC>AR=pthe
firmsupplyiszero.At
pointAC=AR=pthefirm
isindifferentbetween
producingornot.Forany
pointAC<AR=pthefirm
isbe`eroffproducing
output.Theexactamount
ofoutputthefirm
producesisdetermined
bythemarginaloutput
rule.Thesupplycurveis0
foranypointAC>AR,
anditfollowtheMC
curveforanypointAC<
AR.
MC
Supply
Curve
AC
p=MR=AR=D
quanRty
EC102
Class5:Q4
SamiraBarzin
Aprice-takingfirm‘slong-runsupplycurvecoincides
with:
a)  itslong-runmarginalcostcurvebelowitslongrunaveragecostcurve✖
b)  itslong-runaveragecostcurveaboveitslong-run
marginalcostcurve✖
c)  itslong-runaveragecostcurvebelowitslong-run
marginalcostcurve✖
d)  itslong-runmarginalcostcurveaboveitslongrunaveragecost-curve✔
EC102
Class5:Q5
SamiraBarzin
Considerthepotatomarketrepresentedbythefollowingfigure:
wheresMissupplybyMashFarm,sSissupplyofSpudsSuppliers
andSSRismarketsupply.Whenthepriceofpotatoesis300,the
quanRRessuppliedbyMashFarm,SpudsSuppliersandthemarket
arerespecRvely:
a)  50,100and150
b)  40,75and150
c)  40,75and115
d)  40,75and100
EC102
Class5:Q5
SamiraBarzin
Themarketsupplyisthesumoftheamountofoutputsuppliedby
eachindividualfirm.Inthiscase,therearetwofirmsonthemarket
withMashFarmsupplying40tonnesofpotatoesandSpuds
Suppliersproducing75tonnesofpotatoes.Thetotalmarketoutput
is:40tonnes+75
tonnes=115tonnes.
EC102
Class5:Q5
SamiraBarzin
Considerthepotatomarketrepresentedbythefollowingfigure:
wheresMissupplybyMashFarm,sSissupplyofSpudsSuppliers
andSSRismarketsupply.Whenthepriceofpotatoesis300,the
quanRRessuppliedbyMashFarm,SpudsSuppliersandthemarket
arerespecRvely:
a)  50,100and150✖
b)  40,75and150✖
c)  40,75and115✔
d)  40,75and100✖
EC102
Class5:Q6
SamiraBarzin
Considerthepotatomarketrepresentedbythefollowingfigure:
wheresMissupplybyMashFarm,sSissupplyofSpudsSuppliers
andSSRismarketsupply.Whenthepriceofpotatoesrisesfrom300
to400,theelasRcityofmarketsupplyis
a)  105/115
b)  115/105
c)  35/100
d)  300/115
EC102
Class5:Q6
SamiraBarzin
ElasRcityofDemand/Supply
changeinquanRty
∆!
!! iniRalprice
∈=
× ∆!
!!
iniRalquanRty
changeinprice
Inthiscasewehave:
∈=
∆!
!!
150 − 115
300
105
×
=
×
=
∆!
!!
400 − 300
115
115
EC102
Class5:Q6
SamiraBarzin
Considerthepotatomarketrepresentedbythefollowingfigure:
wheresMissupplybyMashFarm,sSissupplyofSpudsSuppliers
andSSRismarketsupply.Whenthepriceofpotatoesrisesfrom300
to400,theelasRcityofmarketsupplyis
a)  105/115✔
b)  115/105✖
c)  35/100✖
d)  300/115✖
EC102
Class5:Q7
SamiraBarzin
SupposethelandsupplyinChicagoisfixedduetozoning
policybythegovernment.Butthedemandforlandis
neitherperfectelasRcorinelasRc.Then
a)  TheelasRcityoflandsupplyisperfectlyinelasRcin
Chicago
b)  TheelasRcityoflandsupplyisperfectlyelasRcin
Chicago
c)  Theburdenoftaxonlandwouldbesharedbytheland
sellersandbuyers
d)  Theburdenoftaxonlandwouldbebornebybuyers
e)  Theburdenoftaxonlandwouldbebornebysellers
EC102
Class5:Q7
SamiraBarzin
ElasRcityofSupply/Demand
p
p
D/S
standarddownwardslopingdemand
p
∈= ∞
∈ > 1
D
D/S
p*
∈ = 1
∈ < 1
∈ = 0
q
q
perfectlyelasRcDemand/Supply
Foranypricepotherthanp*the
quanRtydemanded/suppliedis0.
Independentlyofthepricethe
quanRtysupplied/demanded
remainsconstant.TheelasRcity
ofdemand/supplyis∈= ∞
perfectlyinelasRcDemand/
Supply
ForanypricepthequanRty
demanded/suppliedremains
constant.
TheelasRcityofdemand/supply
is∈= 0
EC102
Class5:Q7
q
ThestandarddemandfuncRonhas
bothelasRcandinelasRcparts.Asthe
quanRtygoesfrom0toq>0the
changeinquanRtyisinfinite,asyou
movealongthecurvethechangein
quanRtybecomesrelaRvelylessthan
thechangeinpricesothecurve
becomesmoreinelasRc.
SamiraBarzin
Supplyisfixed,soindependentlyofthepricethesupplyisalwaysconstantatq.This
isthedefiniRonofinelasRcsupply.
ForthegivensuppliedquanRtyq*buyersare
willingtopaypricep*,sothemarketclearsat
theintersecRonofsupplyanddemandwithq* p
S
andp*.Ifthetaxweretoincreasethepricethat
thebuyerswouldpaysothatptax>p*thenthe
marketwouldnotclearasbuyersarenotwilling
topayatthisprice.Sellerswouldhavetoreduce
theirpriceinordertomeetthedemandedprice
ofbuyerssothatthepricepaidbybuyersisthe p*
Dconsumer‘
sameasbeforebutthepricereceivedbysellers
tax
sperspecRve
isp’=p*-tax.ThereareeffecRvelytwodemand p'
curves(onethatthesellerfaces(whichisthe
Dsellers‘s
originaldemandcurve–tax)andonethatthe
perspecRve
consumerdemands).Thetaxfallsonthesellers.
q
q*
EC102
Class5:Q7
SamiraBarzin
SupposethelandsupplyinChicagoisfixedduetozoning
policybythegovernment.Butthedemandforlandis
neitherperfectelasRcorinelasRc.Then
a)  TheelasRcityoflandsupplyisperfectlyinelasRcin
Chicago✔
b)  TheelasRcityoflandsupplyisperfectlyelasRcin
Chicago✖
c)  Theburdenoftaxonlandwouldbesharedbytheland
sellersandbuyers✖
d)  Theburdenoftaxonlandwouldbebornebybuyers✖
e)  Theburdenoftaxonlandwouldbebornebysellers✔
EC102
Class5:Q8
SamiraBarzin
LondonisoneofthegreenestciResintheworld.Hyde
Park,GreenPark,Regent’sPark,…,younameit.
AccordingtoareportfromtheIndependent,47%ofthe
surfaceofLondoniscoveredbygreenspace.
EC102
Class5:Q8
SamiraBarzin
However,Londonisalsooneofthemostexpensive
ciResintheworld,especiallythehousing.Accordingto
areportbytheGlobalPropertyGuide,theLondon
housingpriceranks2ndglobally,justbehindMonaco,a
populartouristcitystate.Peoplecomplainthatthe
housesinLondonarejustnotaffordable.
EC102
Class5:Q8
SamiraBarzin
EC102
Class5:Q8
SamiraBarzin
ThereareopinionsproposingthattheGovernmentof
Londonshouldincreaselandsupplybyrelaxingitsgreen
zoneconstraint.PeoplesupporRngthisideaclaimthat
thiswouldmakethehousesinLondonmoreaffordable.
TherearealsoopinionsthatLondonshouldinsteadtax
foreignhousebuyersheavily.Itistheforeigninvestors
thatpushupthehousingprice,notthegreenspace.We
shouldkeepthegreenspaceasitis.
Whichsidedoyousupport?Why?