Microeconomic week 5 notes from chapter 12 & 13 PDF

Preview

Summary

notes with test answers for week 5 microeconomic...

Description

industrial organization—the study of how firms’ decisions about prices and quantities depend on the market conditions they face. What is a firm’s profit? The amount that the firm receives for the sale of its output (cookies) is called total revenue. The amount that the firm pays to buy inputs (flour, sugar, workers, ovens, and so forth) is called total cost. As the business owner, Chloe gets to keep any revenue above her costs. That is, a firm’s profit equals its total revenue minus its total cost: Profit = Total revenue – Total cost Total revenue is the easy part: It equals the quantity of output the firm produces multiplied by the price at which it sells its output. Because these opportunity costs require the firm to pay out some money, they are called explicit costs. some of a firm’s opportunity costs, called implicit costs, do not require a cash outlay. a firm’s economic profit as its total revenue minus all its opportunity costs (explicit and implicit) of producing the goods and services sold. the firm’s accounting profit as its total revenue minus only its explicit costs. This relationship between the quantity of inputs (workers) and quantity of output (cookies) is called the production function. The marginal product of any input in the production process is the change in the quantity of output obtained from one additional unit of that input. The second worker has a marginal product of cookies, the third worker has a marginal product of cookies, and the fourth worker has a marginal product of cookies. This property is called diminishing marginal product. two columns of data with quantity produced on the horizontal axis and total cost on the vertical axis. This graph is called the total-cost curve. fixed costs, do not vary with the quantity of output produced. variable costs, change as the firm alters the quantity of output produced. To find the cost of the typical unit produced, we divide the firm’s costs by the quantity of output it produces. Total cost divided by the quantity of output is called average total cost. . Average fixed cost equals the fixed cost divided by the quantity of output, and average variable cost equals the variable cost divided by the quantity of output.

Average total cost = total cost / quantity Marginal cost = change in total cost / change in quantity Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced. Marginal cost tells us the increase in total cost that arises from producing an additional unit of output. This quantity is sometimes called the efficient scale of the firm. Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising. The marginal-cost curve crosses the average-total-cost curve at its minimum.  Marginal cost eventually rises with the quantity of output.  The average-total-cost curve is U-shaped.  The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost. Because many decisions are fixed in the short run but variable in the long run, a firm’s long-run cost curves differ from its short-run cost curves. When long-run average total cost declines as output increases, there are said to be economies of scale. When long-run average total cost rises as output increases, there are said to be diseconomies of scale. When long-run average total cost does not vary with the level of output, there are said to be constant returns to scale.

A competitive market, sometimes called a perfectly competitive market, has two characteristics:  There are many buyers and many sellers in the market.  The goods offered by the various sellers are largely the same. Buyers and sellers in competitive markets must accept the price the market determines and, therefore, are said to be price takers. for all types of firms, average revenue equals the price of the good. for competitive firms, marginal revenue equals the price of the good. As long as marginal revenue exceeds marginal cost, increasing the quantity produced raises profit.

three general rules for profit maximization:  If marginal revenue is greater than marginal cost, the firm should increase its output.  If marginal cost is greater than marginal revenue, the firm should decrease its output.  At the profit-maximizing level of output, marginal revenue equals marginal cost. shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. Exit refers to a long-run decision to leave the market. The process of entry and exit ends only when price and average total cost are driven to equality. in the long-run equilibrium of a competitive market with free entry and exit, firms must be operating at their efficient scale. Because firms can enter and exit more easily in the long run than in the short run, the long-run supply curve is typically more elastic than the short-run supply curve. Accounting ProfitA =

Total Revenue−Total Explicit CostsTotal Revenue−Total Explicit Costs

ccounting Profit =

=

$701,000−($420,000+$247,000)$701,000−$420,000+$247,000

=

=

$34,000

= Economic ProfitEconomi

=

c Profit

=

Total Revenue−Total CostsTotal Revenue−Total Costs

= Total Revenue−(Total Explicit Costs+Total Implicit Costs)Total R = evenue−Total Explicit Costs+Total Implicit Costs = $701,000−(($420,000+$247,000)+($32,000+$9,000)) = $701,000−$420,000+$247,000+$32,000+$9,000 = =

−$7,000

Economies of

Constant Returns

Diseconomies of

Scale

to Scale

Scale

Range

Between 300 and 400 bikes per month

Fewer than 300 bikes per month

More than 400 bikes per mont65

1-constant 2-economies5 Quantity Variable Cost Fixed Cost Total Cost (Houses Painted per Month)(Dollars)(Dollars)(Dollars) 0 0 150 150 1

15

150

165

2

35

150

185

3

60

150

210

4

90

150

390

5

135

150

28548

6

240

150

390

7

480

150

630

The efficient scale is 5 houses. The quantity that minimizes average total cost is called the efficient scale. In this case, the efficient scale is 5 houses per month. See Section: Cost Curves and Their Shapes. 83.334 16.67 10300280000 In the following table, complete the marginal cost, average variable cost, and average total cost columns.

Quantity

Variable Cost

Total Cost

Marginal Cost

Average Variable Cost

Average Total Cost

(Vats of juice)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

0

0

30 38.00

1

8

8.00

46.00

9.00

57.00

10.00

70.00

12.50

92.50

38

48.00

2

18

48

60.00

3

30

60

80.00

4

50

80

Quantity

Variable Cost

Total Cost

Marginal Cost

Average Variable Cost

Average Total Cost

(Vats of juice)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

110.00

5

80

16.00

126.00

20.00

170.00

110

150.00

6

120

150

Points: 0.33 / 1 Close Explanation Explanation: Marginal cost is the amount that total cost (TCTC) rises when the firm increases production by 1 unit of output (QQ). Therefore, you can compute the marginal cost of the first unit of output in the following way:

Marginal CostMarginal C = ΔTCΔQ ΔTCΔQ

ost =

=

$38−$301−0$38−

=

$301−0

=

$8$8 = Average variable cost is variable cost divided by the quantity of output. Therefore, you can compute the average variable cost of the first unit in the following way: Average Variable CostAverage Variable = Cost =

Variable CostQuantityVariable

tity

CostQuan

= $81$81

=

=

$8$8 = Average total cost is total cost divided by the quantity of output. It represents the cost of a typical unit of output if total cost is divided evenly over all the units produced. Therefore, you can compute the average total cost of the first unit in the following way: Average Total CostAverage Total = Cost =

Total CostQuantityTotal

CostQuant

ity

= $381$381

=

=

$38$38 = Similar calculations can be made to complete the remainder of the table. See Section: Average and Marginal Cost. On the following graph, use the orange points (square symbol) to plot the marginal-cost curve for Jane's Juice Bar. (Note: Be sure to plot from left to right and to plot between integers. For example, if the marginal cost of increasing production from 1 vat of juice to 2 vats of juice is $5, then you would plot a point at (1.5, 5).) Then use the purple points (diamond symbol) to plot the average-variable cost curve starting at 1 vat of juice, and use the green points (triangle symbol) to plot the averagetotal-cost curve also starting at 1 vat of juice. Your AnswerMarginal CostAverage Variable CostAverage Total Cost01234564035302520151050CostsQuantity (Vats of juice)1, 38 Correct Answer Points: 0/1 Close Explanation Explanation: Given the information in the previous table, the marginal-cost curve comprises the following points: (0.5, 8), (1.5, 10), (2.5, 12), (3.5, 20), (4.5, 30), and (5.5, 40); the average-variable-cost curve comprises (1, 8), (2, 9), (3, 10), (4, 12.5), (5, 16), (6, 20); and the average-total-cost curve comprises (1, 38), (2, 24), (3, 20), (4, 20), (5, 22), and (6, 25). See Section: Cost Curves and Their Shapes. Which of the following statements are true according to the previous graph? Check all that apply. The marginal-cost curve lies below the average-variable-cost curve. The marginal-cost curve is below the average-total-cost curve when output is greater than four and average total cost is rising. The marginal-cost curve is above the average-total-cost curve when output is greater than four and average total cost is rising. Points: 0.33 / 1 Close Explanation Explanation: The marginal-cost curve is below the average-total-cost curve when output is less than four and average total cost is declining. The marginal-cost curve is above the average-total-cost curve when

output is above four and average total cost is rising. Moreover, the marginal-cost curve lies above the average-variable-cost curve. See Section: The Relationship Between Marginal Cost and Average Total Cost. Jane's Juice Bar has the following cost schedules: In the following table, complete the marginal cost, average variable cost, and average total cost columns.

Quantity

Variable Cost

Total Cost

Marginal Cost

Average Variable Cost

Average Total Cost

(Vats of juice)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

0

0

30 35.00

1

5

5.00

40.00

7.50

30.00

10.00

30.00

35

22.50

2

15

45

20.00

3

30

60 20.00

Quantity

Variable Cost

Total Cost

Marginal Cost

Average Variable Cost

Average Total Cost

(Vats of juice)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

4

50

12.50

32.50

15.00

36.00

17.50

40.00

80

21.00

5

75

105

22.50

6

105

135

Points: 0.39 / 1 Close Explanation Explanation: Marginal cost is the amount that total cost (TCTC) rises when the firm increases production by 1 unit of output (QQ). Therefore, you can compute the marginal cost of the first unit of output in the following way:

Marginal CostMarginal C = ΔTCΔQ ΔTCΔQ

ost =

=

$35−$301−0$35−

=

$301−0

= =

$5$5

Average variable cost is variable cost divided by the quantity of output. Therefore, you can compute the average variable cost of the first unit in the following way:

Average Variable CostAverage Variable = Cost =

Variable CostQuantityVariable

CostQuan

tity

= $51$51

=

=

$5$5 = Average total cost is total cost divided by the quantity of output. It represents the cost of a typical unit of output if total cost is divided evenly over all the units produced. Therefore, you can compute the average total cost of the first unit in the following way: Average Total CostAverage Total = Cost =

Total CostQuantityTotal

CostQuant

ity

= $351$351

=

=

$35$35 = Similar calculations can be made to complete the remainder of the table. See Section: Average and Marginal Cost. On the following graph, use the orange points (square symbol) to plot the marginal-cost curve for Jane's Juice Bar. (Note: Be sure to plot from left to right and to plot between integers. For example, if the marginal cost of increasing production from 1 vat of juice to 2 vats of juice is $5, then you would plot a point at (1.5, 5).) Then use the purple points (diamond symbol) to plot the average-variable cost curve starting at 1 vat of juice, and use the green points (triangle symbol) to plot the averagetotal-cost curve also starting at 1 vat of juice. Your AnswerMarginal CostAverage Variable CostAverage Total Cost01234564035302520151050CostsQuantity (Vats of juice)6, 40 Correct Answer Points: 0.33 / 1 Close Explanation Explanation: Given the information in the previous table, the marginal-cost curve comprises the following points: (0.5, 5), (1.5, 10), (2.5, 15), (3.5, 20), (4.5, 25), and (5.5, 30); the average-variable-cost curve comprises (1, 5), (2, 7.5), (3, 10), (4, 12.5), (5, 15), (6, 17.5); and the average-total-cost curve comprises (1, 35), (2, 22.5), (3, 20), (4, 20), (5, 21), and (6, 22.5). See Section: Cost Curves and Their Shapes. Which of the following statements are true according to the previous graph? Check all that apply. The marginal-cost curve lies above the average-variable-cost curve. The marginal-cost curve is below the average-total-cost curve when output is greater than four and average total cost is rising. The marginal-cost curve is below the average-total-cost curve when output is less than four and average total cost is declining. Points:

0.67 / 1 Close Explanation Explanation: The marginal-cost curve is below the average-total-cost curve when output is less than four and average total cost is declining. The marginal-cost curve is above the average-total-cost curve when output is above four and average total cost is rising. Moreover, the marginal-cost curve lies above the average-variable-cost curve. See Section: The Relationship Between Marginal Cost and Average Total Cost.

Marginal cost = change in cost/ change in quantity XYZ Company is producing 1000 units at 10,000 dollars. It had to increase its production to 1500 units, and the total cost of production also increased to 15,000 dollars. The marginal cost will be Marginal cost = change in cost/ change in quantity Marginal cost = 15000 – 10000 / 1500 – 1000 Marginal cost = 5000 / 500 Marginal cost = 10...