301 Econ F07 PROBLEM SET 6 - Tuesday Nov 20 in class OR get to Jiyoun's office door before you leave on Wednesday Nov 21 Wissink
1. Critically evaluate the following statements and explain in what way or ways they are true, false, or
uncertain. a. If an entrepreneur's firm is earning zero accounting profit, then it should really consider getting out of the market. b. If a perfectly competitive industry is an external constant cost industry, then the normal long run equilibrium price will never change. c. All fixed costs are avoidable in the short run if you choose to shut down.
2. Assume that the U.S. sugar cane industry is: 1) perfectly competitive, 2) presently in long-run
equilibrium, 3) an external constant-cost industry, 4) such that each farm has a set of "typically" shaped cost curves (in particular this means that short-run supply is typically shaped), 5) such that all cane farms are the same, 6) such that sugar cane demand is typically shaped. a. Graph the present long-run equilibrium situation for both a typical plant and the entire industry. b. Let the demand for sugar cane decrease because of public concern about child obesity. Explain and indicate on the graphs for the previous part, what happens in the short-run and what must happen for the industry to be in long-run equilibrium once again. c. Suppose now that the government is persuaded by a sugar cane lobbyist to impose a price support at the ORIGINAL price level. Using your graphs in part (a), explain what will happen consequently, that is, explain what will happen in the U.S. cane industry in the short-run and in the long-run if the support is imposed.
3. You are given the following information about the perfectly competitive widget industry:
all firms are identical; all firms have access to a technology with the production function x=L1/2 where L is measured in hours; all firms must get a permit to operate and the cost of the permit is $16; the current market wage rate is $1/hour; market demand is X D = 100 P. Find and graph the lratc curve. What is the value for the long run equilibrium x*? P*? X*? N*? Find and graph the typical firm's short run supply curve. Graph the side-by-side picture of the long run equilibrium in this market. Show where the following are in your graphs (P*, x*, X*, N* and profit*). e. What is the value of Net Social Surplus at the long run equilibrium and show it in the appropriate graph? f. What are the values of Consumers' and Producers' Surplus and show them in the appropriate graph?
4. Recall from prelim 2... Ackles Apples of Cortland which is a perfectly competitive apple orchard.
a. b. c. d.
Suppose Ackles Apples has typical "text book curvy" short run cost curves. Also suppose that the market demand for apples is typically shaped. Assume that the apple is market currently in a long run equilibrium. Now suppose that Governor Spitzer and the New York State legislature pass a bill requiring that each apple farm in New York State immediately pay the state $L for a license to sell apples. How do the long run market and firm equilibiria change? Answer just using graphs.
5. Ima Baker runs her own bakery specializing in cheese cakes. Every month she pays $5,000/month in
rent for a store-front bakery shop. She also rents a special oven for $200 month. Ima has also borrowed money to buy a fax/printer/copier. The machine does not depreciate. Ima took out a month long loan from the bank to buy the super-duper printer at an interest rate of 5%. The machine cost $1,000 to purchase. Ima also uses her garage to store cream cheese. Her garage is nice and could easily be rented out for $200 a month in the real estate market. Ima uses cream cheese and Ima's labor to make her cheese cakes. The table below shows the relationship between number of hours Ima works on baking cheese cakes and how many she can bake. It also shows the number of pounds of cream cheese Ima must use as a function of how many cheese cakes she bakes. Cream cheese sells for $2/pound. The maximum number of cheese cakes she can make a month is 1100. Ima also happens to be a financial wizard and knows a lot about corporate financial statements. CitiBank is interested in Ima's expertise and offers to pay her $100/hour to review their books and do consults for their legal battles. She can do the consulting work at her convenience for as many hours as she wants each month. She would get $100 per hour for each hour of consulting for CitiBank. Please do this problem ...