Transcript MACROECONOMICS SS204

MICROECONOMICS
BU224
Seminar
Seven
Agenda


Course Issues and Questions
Review of Chapter 13 Concepts
• Perfect Competition

Review of Chapter 14 Concepts
• Monopoly

Questions
P
$140
$130
Market Supply and Demand
S
$120
$100
$80
$60
$40
D
$20
Q
5 10 15 20 25 30 35 40 45
$140
$130
$120
$100
Individual firm demand
D
$80
$60
$40
$20
5 10 15 20 25 30 35 40 45
Kate’s Katering provides catered meals, and the catered meals industry is
perfectly competitive. Kate’s machinery costs $100 per day and is the only
fixed input. Her variable cost is comprised of the wages paid to the cooks
and the food ingredients.
The variable cost associated
accompanying table.
with
each
level
of
output
is
given
in
the
a. Calculate the total cost, the average variable cost, the average total cost,
and the marginal cost for each quantity of output. (8pts)
From Kate’s variable cost (VC), the accompanying table calculates Kate’s total
cost (TC), average variable cost (AVC), average total cost (ATC), and marginal
cost (MC).
Quantity of meals
0
10
20
30
40
50
FC
$100
100
100
100
100
100
VC
$0
200
300
480
700
1,000
TC
100
300
400
580
800
1100
MC
0
20
10
18
22
30
AVC
0
20
15
16
17.5
20
ATC
0
30
20
19.3
20
22
b. What is the break-even price? (6pts)
Kate’s break-even price, the minimum average total cost, is $19.33, at an output
quantity of 30 meals.
What is the shut-down price? (6pts)
Kate’s shut-down price, the minimum average variable cost, is $15.
c. Suppose that the price at which Kate can sell catered meals is $21 per
meal. In the short run, will Kate earn a profit? (5pts)
When the price is $21, Kate will make a profit: the price is above her break-even
price.
In the short run, should she produce or shut down? (5pts)
And since the price is above her shut-down price, Kate should produce in
the short run, not shut down.
d. Suppose that the price at which Kate can sell catered meals is $17 per
meal. In the short run, will Kate earn a profit? (5pts)
When the price is $17, Kate will incur a loss: the price is below her break-even
price.
In the short run, should she produce or shut down? (5pts)
But since the price is above her shut-down price, Kate should produce in the
short run, not shut down.
e. Suppose that the price at which Kate can sell catered meals is $13 per
meal. In the short run, will Kate earn a profit? (5pts)
When the price is $13, Kate will incur a loss: the price is below her break-even
price.
In the short run, should she produce or shut down? (5pts)
And since the price is also below her shut-down price, Kate should shut down in
the short run.
Chapter 13 Questions
1. If a profit-maximizing firm is producing an
output level in which marginal revenue
exceeds marginal cost, should it produce
more, less or the same?
2. If a profit-maximizing firm is
producing an output level in which
marginal revenue equals marginal
cost, then is this firm earning a
profit?
Chapter 13 Questions
3. If a competitive industry is currently
losing money, what can be expected to
happen to the number of sellers, the
price of the product, the volume of
output and losses in this industry over
time?
4. If a competitive industry expands and
higher wages must be paid to attract
more workers then what will the longrun supply curve for this industry look
like?
Chapter 13 Questions
1. For each of the following, is the
business a price-taking producer?
Explain your answers.
a. A cappuccino café in a university town
where there are dozens of very similar
cappuccino cafés
b. The makers of Pepsi-Cola
c. One of many sellers of zucchini at a local
farmers’ market
Chapter 13 Questions
2. For each of the following, is the
industry perfectly competitive?
Referring to market share, standardization of
the product, and/or free entry and exit,
explain your answers.
a. Aspirin
b. Shania Twain concerts
c. SUVs
Suppose that De Beers is a single-price monopolist in the market for
diamonds. De Beers has five potential customers: Raquel, Jackie, Joan,
Mia, and Sophia.
Each of these customers will buy at most one diamond—and only if the
price is just equal to, or lower than, her willingness to pay. Raquel’s
willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and
Sophia’s, $0.
De Beers’ marginal cost per diamond is $100. The demand schedule for
diamonds is shown in the accompanying table.
a. Calculate De Beers’ total revenue and its marginal revenue (10pts)
Price of
diamond
$500
400
300
200
100
0
Qty of diamonds
demanded
0
1
2
3
4
5
Total
Revenue
0
400
600
600
400
0
Marginal
Revenue
+400
+200
0
-200
-400
From your calculation, draw the demand curve and the marginal revenue
curve. (8pts)
- See ‘How to draw the Graphs’ in the Doc Sharing for graphing methods -
The accompanying diagram illustrates De Beers’s demand curve and marginal
revenue (MR) curve.
b. Explain why De Beers faces a downward-sloping demand curve (5pts)
De Beers is the only producer of diamonds, so its demand curve is the market
demand curve. And the market demand curve slopes downward: the lower the
price, the more customers will buy diamonds.
c. Explain why the marginal revenue from an additional diamond sale is
less than the price of the diamond (5pts)
If De Beers lowers the price sufficiently to sell one more diamond, it earns extra
revenue equal to the price of that one extra diamond. This is the quantity effect of
lowering the price. But there is also a price effect: lowering the price means that
De Beers also has to lower the price on all other diamonds, and that lowers its
revenue. So the marginal revenue of selling an additional diamond is less than
the price at which the additional diamond can be sold.
d. Suppose De Beers currently charges $200 for its diamonds.
If it lowered the price to $100, how large is the price effect? (5pts)
If the price is $200, then De Beers sells to Raquel, Jackie, and Joan. If it lowers
the price to $100, it will additionally sell a diamond to Mia. The price effect is that
De Beers loses $100 (the amount by which it lowered the price) each from selling
to Raquel, Jackie, and Joan. So the price effect lowers De Beers’s revenue by 3
× $100 = $300.
How large is the quantity effect? (5pts)
The quantity effect is that De Beers sells one more diamond (to Mia), at $100. So
the quantity effect is to raise De Beers’s revenue by $100.
e. Add the marginal cost curve to your diagram from part a. (8pts)
… and determine which quantity maximizes De Beers’s profit and which
price De Beers will charge (4pts)
The marginal cost (MC) curve is constant at $100, as shown in the diagram.
Marginal revenue equals marginal cost at a quantity of 2 diamonds. So De Beers
will sell 2 diamonds at a price of $300 each.
Chapter 14 Questions
1.
2.
3.
4.
What are some relevant public policy
questions when government considers
breaking up a monopoly?
Can a monopoly lose money?
How long can a monopoly earn
economic profits?
Why does a monopolist produce less
and charge a higher price compared
to a competitive market?
Chapter 14 Questions
5. What evidence suggests that some
government regulation may
reduce competition in practice?
6. How can a monopoly maintain its
single-seller status?
Chapter 14 Questions
1. Each of the following firms possesses
market power. Explain its source.
a. Merck, the producer of the patented
cholesterol-lowering drug Zetia
b. Verizon, a provider of local telephone
service
c. Chiquita, a supplier of bananas and
owner of most banana plantations
Chapter 14 Questions
2. Skyscraper City has a subway system, for which a
one-way fare is $1.50. There is pressure on the mayor
to reduce the fare by one-third, to $1.00. The mayor is
dismayed, thinking that this will mean Skyscraper City
is losing one-third of its revenue from sales of subway
tickets. The mayor’s economic adviser reminds her that
she is focusing only on the price effect and ignoring the
quantity effect. Explain why the mayor’s estimate of a
one-third loss of revenue is likely to be an
Overestimate. Illustrate with a diagram.
Microeconomics
Questions?