AGENDA Tues 10/20
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QOD #25: Milk Returns
Graphing Review
Partner Practice Assessments
2008 FRQ #1
HW: Review CH 8 & 9 Assessment 10/22
QOD #25: Milk Returns
There are 300 purely competitive farms in the local dairy market.
Of the 300 dairy farms, 298 have a cost structure that generates
profits of $24 for every $300 invested.
1. What is their percentage rate of return?
The other two dairies have a cost structure that generates profits
of $22 for every $200 invested.
2. What is their percentage rate of return?
3. Assuming that the normal rate of profit in the economy is 10
percent, will there be entry or exit?
4. Will the change in the number of firms affect the two that
earn $22 for every $200 invested?
5. What will be the rate of return earned by most firms in the
industry in long-run equilibrium?
6. If firms can copy each other’s technology, what will be the
rate of return eventually earned by all firms?
QOD #25: Milk Returns
1. The percentage return for the 298 dairy farms is 8%.
2. The percentage return for the other two dairy farms is 11%.
3. If the normal rate of profit in the economy is 10%, some of the
dairy farms earning only 8% will exit the industry.
4. The change in the number of firms will affect the other two
higher-profit firms, because with the exit of some firms, the
price of milk will increase and those two firms can earn an even
higher return.
5. In long-run equilibrium, most firms will earn the same 10% rate
of return that is prevalent in the economy.
6. And if the firms are able to copy each other’s technology,
eventually all firms in the industry will earn the same 10% return
in long-run equilibrium.
#1
QODFRQ
#25:2008
MilkQ
Returns
Callahan’s Orchard grows apples and operates in a constant-cost, perfectly competitive
apple industry. Callahan’s Orchard is currently in long-run equilibrium.
(a) Draw correctly labeled side-by-side graphs for the apple market and
Callahan’s Orchard, and show each of the following.
(i) Market output and price, labeled as “QM” and “PM”, respectively
(ii) Callahan’s output and price, labeled as “QF” and “PF”, respectively
(b) Now assume that the government provides farm support to apple growers
by granting an annual lump-sum subsidy to all apple growers. Indicate the
effect the subsidy would have on each of the following in the short run.
(i) Callahan’s quantity of output. Explain.
(ii) Callahan’s profit
(iii) The number of firms in the industry
(c) Indicate how each of the following will change in the long run as a result of
the lump-sum subsidy.
(i) The number of firms in the industry. Explain.
(ii) Price
(iii) Industry output
Entry Eliminates Economic Profits
P
P
S1
MC
ATC
$60
50
MR
40
S2
$60
50
D2
40
D1
0
100
(a)
Single Firm
LO3
q
0
80,000 90,000 100,000
Q
(b)
Industry
9-5
Exit Eliminates Losses
P
P
S3
MC
ATC
$60
S1
$60
50
50
MR
D1
40
40
D3
0
100
(a)
Single Firm
LO3
q
0
80,000
90,000
100,000 Q
(b)
Industry
9-6
LR Supply: Constant-Cost Industry
P
P1
P2 $50
Z3
Z1
Z2
S
P3
D1
D3
0
LO4
Q3
90,000
Q1
100,000
D2
Q2
110,000
Q
9-7
LR Supply: Increasing-Cost Industry
P
S
P2 $55
Y2
P1 $50
Y1
P3 $40
Y3
D2
D1
D3
0
LO4
Q3
90,000
Q1
100,000
Q2
110,000
Q
9-8
LR Supply: Decreasing-Cost Industry
P
P3 $55
X3
X1
P1 $50
X2
P2 $40
D3
S
D2
D1
0
LO4
Q3
90,000
Q1
100,000
Q2
110,000
Q
9-9
Pure Competition and Efficiency
Single Firm
Market
P=MC=Minimum
ATC (Normal Profit) MC
Consumer
Surplus
S
Price
Price
ATC
P
MR P
Producer
Surplus
D
0
LO5
Qf
Quantity
0
Qe
Quantity
9-10
Efficiency Gains from Entry
a
S
P1
b
c
d
f
P2
D
Q1
Q2
9-11