ECON 11 Study Guide - Final Guide: Marginal Cost, Inferior Good, Midpoint Method

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28 Feb 2018

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Chapter 12 - the partial equilibrium competitive model. Market demand: using a subscript i (i =1, n) to represent each person"s demand function for good x, we can define the total demand in the market as, 3 things about the summation, 1. We assume that everyone in this marketplace faces the same prices for both goods: 2. Each person"s income enters into his or her own specific demand function: 3. We have used an uppercase x to refer to market demand a notation we will soon modify. The market demand curve summarizes the ceteris paribus relationship between x and. Px: to keep matters straight, economists usually reserve the term change in quantity demanded for a movement along a fixed demand curve in response to a change in px. Assuming that each individual"s demand curve is downward sloping, this market demand curve will also be downward sloping.

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The daily demand for travel at a small regional airport is initially QD = 1000 - p; where quantity is in passengers and price is in dollars per passenger. There are initially 10 price-taking firms serving this market and each of them has the production function: q = sqrt (lk) where q is in passengers, and labor and capital are in some appropriately specified units. The price of a unit of labor is w = 100 per day; the price of a unit of capital is v = 100 per day, and this industry has constant costs. Each firm initially has a capital stock of k0 = 80. day; and this industry has constant costs. Each firm initially has a capital stock of k0 = 80.

(a) Derive the short-run cost function, SC(q), for each firm in the market.

(b) Derive the short-run market supply function, QS.

(c) Find the short-run competitive equilibrium price, p*, and quantity, Q*. How much labor, L*, does the industry employ at the competitive equilibrium?

(d) Derive the long-run cost function, C(q), of each firm in the industry.

(e) Describe the long-run market supply curve. Does the short-run competitive equilibrium at (Q*; p*) also correspond to a long-run competitive equilibrium? Explain why or why not.

Now, imagine that a catastrophic event causes the daily demand for air travel in this market to fall unexpectedly to ~QD = 750 - p Continue to assume that each of the 10 firms has a capital of k0 = 80 in the short run.

(f) Find the new short-run competitive equilibrium price, p**, and quantity, Q**, in this market. How much labor, L**, does the industry employ in the new short-run competitive equilibrium?

(g) What is the new long-run competitive equilibrium price, p***, and quantity, Q***? Describe what must happen as the industry moves from the short-run competitive equilibrium at (Q**; p**) to the long-run competitive equilibrium at (Q***; p***). How much labor L*** does the industry employ at the new long-run equilibrium?

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Question 1 (1 point) Question 1 Unsaved In a competitive market the equilibrium price is determined: Question 1 options: at the intersection of the firmâs demand and the market supply curves. at the intersection of the market demand and supply curves. at the intersection of the firmâs demand and marginal cost curves. so as to cover the costs of the potential firms. so as to cover the costs of the firms currently in the industry. Save Question 2 (1 point) Question 2 Unsaved If the perfectly competitive market demand for gym shoes is given by QD = 100 â P and the market supply is given by QS = 10 + 2P, then the equilibrium price and quantity will be: Question 2 options: P = 50 and Q = 50. P = 40 and Q = 90. P = 40 and Q = 60. P = 30 and Q = 70. P = 25 and Q = 75. Save Question 3 (1 point) Question 3 Unsaved A constant-cost industry is one in which: Question 3 options: input prices do not change over time. technology does not change over time. input prices and technology do not change as firms enter or exit the industry. input prices and technology do not change over time. firms have reached the maturity phase of the industryâs life cycle. Save Question 4 (1 point) Question 4 Unsaved At the profit-maximizing level of output for the monopolist: Question 4 options: total revenue is equal to total cost. total costs are minimized. total revenue is maximized. marginal revenue is equal to marginal cost. average revenue is equal to average cost. Save Question 5 (1 point) Question 5 Unsaved Craigâs Red Sea Restaurant is the only restaurant in Columbia, South Carolina, that sells Ethiopian food. The demand for Ethiopian food is given by Q = 25 â P. Craigâs costs are given by TC = 25 + Q + 5Q2. Its maximum monopoly profit is: Question 5 options: â$1. $21. $22. $24. $26. Save Question 6 (1 point) Question 6 Unsaved So long as price exceeds average variable cost, in the model of monopolistic competition, a firm maximizes profits by producing where: Question 6 options: the difference between marginal revenue and marginal cost is maximized. marginal cost equals marginal revenue. marginal revenue equals price. the difference between price and marginal cost is maximized. price equals marginal cost. Save Question 7 (1 point) Question 7 Unsaved If a firm in a monopolistically competitive industry is profit maximizing, it should choose its level of advertising such that the marginal revenue of an additional dollar of advertising: Question 7 options: is equal to the elasticity of its demand curve minus 1. is exactly $1. increases revenues by $1. is equal to 1 plus the elasticity of its demand curve. is equal to the elasticity of its demand curve. Save Question 8 (1 point) Question 8 Unsaved Firms advertise in order to: Question 8 options: build brand loyalty. appeal to the price-sensitive consumers. increase the demand elasticities of their loyal customers. shift the market supply curve to the left. shift the market demand curve to the left. Save Question 9 (1 point) Question 9 Unsaved Firms offer promotions in order to: Question 9 options: build brand loyalty. appeal to the price-sensitive consumers. increase the demand elasticities of their loyal customers. shift the market supply curve to the left. shift the market demand curve to the left. Save Question 10 (1 point) Question 10 Unsaved If the demand increases for the product of a decreasing-cost industry: Question 10 options: short-run price goes up, but long-run price falls. long-run output goes up, but long-run price may go up or down. short-run output goes up, but long-run output may go up or down. long-run output goes up, but short-run price remains constant. long-run price goes up, but short-run price may go up or down. Save Question 11 (1 point) Question 11 Unsaved If the demand increases for the product of an increasing-cost industry: Question 11 options: short-run price goes up, but long-run price falls. long-run output goes up, but long-run price may go up or down. short-run output goes up, but long-run output may go up or down. long-run output goes up, but short-run price remains constant. short-run price goes up, and long-run price goes up. Save Question 12 (1 point) Question 12 Unsaved When Pan United Airlines gives a $400 fare discount to persons with student IDs, they are practicing: Question 12 options: first-degree price discrimination. second-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 13 (1 point) Question 13 Unsaved When a utility charges homeowners less than big industrial users, it is practicing: Question 13 options: first-degree price discrimination. fourth-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 14 (1 point) Question 14 Unsaved Cereal manufacturersâ use of coupons can be partially explained by: Question 14 options: first-degree price discrimination. second-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 15 (1 point) Question 15 Unsaved If a firm supplies separable markets with price elasticities h1 and h2, it should set prices P1 and P2 so that: Question 15 options: P1h1 = P2h2. P1 /h1 = P2 /h2. P1(1 + 1/h1) = P2 (1 + 1/h2). P1/(1 â 1 /h1) = P2 / (1 â 1/h2). P1 = 1 â 1/h1 and P2 = 1 â 1/h2. Save Question 16 (1 point) Question 16 Unsaved If a firm supplies separable markets with price elasticities h1 = â3 and h2 = â2, it should set prices P1 and P2 so that: Question 16 options: P1 = P2. 3P1 = 2P2. 2P1 = 3P2. 2/3P1 = 1/2P2. 2P1 = 2/3P2. Save Question 17 (1 point) Question 17 Unsaved Women are often charged more than men for haircuts performed by the same haircutter. This is not considered price discrimination because: Question 17 options: women receive more consumer surplus from haircuts than men receive. haircutters claim to spend more time on womenâs hair, raising the cost of the haircut to the firm. firms make up the extra cost to consumers by giving women free samples of products. men receive more consumer surplus from haircuts than women receive. women have a lower price elasticity of demand for haircuts. Save Question 18 (1 point) Question 18 Unsaved If price is above the average variable cost but below the average total cost of a representative firm in a competitive industry: Question 18 options: there will be entry to the industry over time. there will be exit from the industry over time. the firms in the industry are just earning a normal rate of return. the firms in the industry are earning a supranormal rate of return. the industry is in long-run equilibrium. Save Question 19 (1 point) Question 19 Unsaved Joeâs T-shirts has costs given by TC = $100 + 3Q, where Q is the number of shirts. If Joe charges $5 each, the percentage markup for 100 shirts is: Question 19 options: 20%. 25%. 33%. 50%. 67%. Save Question 20 (1 point) Question 20 Unsaved In the model of monopolistic competition, there can be short-run: Question 20 options: losses or profits, but there must be profits in long-run equilibrium. profits, but there must be losses in long-run equilibrium. losses or profits, but there must be losses in long-run equilibrium. losses or profits, but there must be neither profits nor losses in long-run equilibrium. losses, but there must be profits in long-run equilibrium.

8. SMC always passes through the

a. minimum of both short run total cost curve and short run variable cost curve.

b. minimum of both short run average cost curve and short run average variable cost curve.

c. minimum of the long run average curve.

d. minimum of the short run average cost curve only.

9. In the first-degree price discrimination consumer surplus is

a. determined by elasticity of demand.

b. determined by the difference between P and MR

c. determined by area under the demand curve minus price.

d. zero.

10. A price taker firm faces a

a. perfectly elastic demand curve

b. declining marginal revenue

c. perfectly elastic supply curve

d. declining market demand curve

11. For a discriminating monopolist, the price is usually

a. higher in the market which has elastic demand

b. higher in the market which has inelastic demand.

c. lower in the market which has inelastic demand

d. higher in the market which as higher marginal revenue.

12. At the point of inflection on the total cost curve.

a. marginal and average costs are equal.

b. marginal cost is maximum.

c. marginal cost is minimum.

d. average cost is minimum.

e. marginal product is minimum.

13. A discriminating monopolist must allocate output by the law of

a. equi-marginal utility c. equi-marginal productivity

b. equi-marginal revenue d. equi-marginal cost

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ECON 11 Study Guide - Final Guide: Marginal Cost, Inferior Good, Midpoint Method

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