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ECO100Y1 Lecture Notes - Lecture 11: Perfect Competition, Price Discrimination, Market Power

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School
UTSG
Department
Economics
Course
ECO100Y1
Professor
James Pesando

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Document Summary

Eco(cid:1005)(cid:1004)(cid:1004): ex(cid:272)lusi(cid:448)e fo(cid:272)us (cid:449)ill (cid:271)e on the (cid:862)(cid:272)onstant (cid:272)ost(cid:863) (cid:272)ase. A perfectly competitive industry is in long-run equilibrium. Each firm is identical, and costs do not change as firms enter or exit the industry. Due to new technology, the mc of producing each unit of output falls by for all firms. Answer: falls by at all levels of output. Answer: falls by [since p=atc in long-run equilibrium so that earning zero economic profits] An author receives royalties equal to 15% of the revenues from the sale of her books. Which is higher: the price the publisher will set, the price the author would like the publisher to set. Profit-maximization: when mr=mc and then set the price using the dd curve. Author would set the revenue-maximizing price (which is lower) Revenue-maximization: when mr of the last book sold is zero. See diagram (assume mc of producing a book is )

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Related Questions

1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.

b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.

c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.

d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.

2. Describe the supply curve of a constant cost industry.

a. Upward sloping

b. Flat

c. Downward sloping, then upward sloping

d. Downward sloping

3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?

4. In a competitive market, the amount of a good that is produced is such that social surplus is:

a. Minimized

b. Maximized

c. Zero

d. Hidden

30) Suppose your trucking firm in a perfectly competitive industry is making zero economic profits in the short run. The federal government imposes a new safety regulation that affects all firms, thus shifting the marginal cost curve upward. As a result your firm's profit maximizing short-run output will A) decrease because the new MC curve will intersect the horizontal demand curve at a lower rate of output. B) remain the same because you will pass on the extra costs to the consumers. C) remain the same since the new regulation does not affect ATC. D) increase as firms will leave the industry at the higher costs, thus driving up the market price. E) increase as price rises in the long run.

1. A firm that is a pure competitor has P > ATC and P > MC on the output (Q) it is presently producing and selling. Is this firm maximizing its profits? If not, which direction should it change its output if it wants to maximize its total profit?

2. Is a pure competitor in short-run or long-run equilibrium if it has P=MC=ATC? Explain.

3. There is free entry in the model of pure competition. Assuming that P > ATC for a vast number of firms producing a standardized product for a given market, what will happen to market supply as the consequence? What will happen to the market price (P) of the product these firms are producing?

4. Firms in the pure competition have horizontal demand functions. (The market determines product price, so firms in this competitive market are price takers.) Do firms in this model have to lower prices if they want to sell more output? Why or why not?