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Perfect Competition chapter 9 >> and the Supply Curve PROBLEMS 1. For each of the following, is the business a price-taking producer? Explain your answers. a. A cappuccino caf in a university town where there are dozens of very similar cappuccino cafs b. The makers of Pepsi-Cola c. One of many sellers of zucchini at a local farmers market 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 3. Kates Katering provides catered meals, and the catered meals industry is perfectly competitive. Kates 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 with each level of output is given in the accompanying table. 2 CHAPTER 9 PROBLEMS Quantity of meals VC 0 10 20 30 40 50 ginal cost for each quantity of output. $0 200 300 480 700 1,000 a. Calculate the total cost, the average variable cost, the average total cost, and the marb. What is the break-even price? What is the shut-down price? 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? In the short run, should she produce or 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? In the short run, should she produce or 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? In the short run, should she produce or shut down? 4. Bob produces DVD movies for sale, which requires only a building and a machine that copies the original movie onto a CD. Bob rents a building for $30,000 per month and rents a machine for $20,000 a month. Those are his fixed costs. His variable cost is given in the accompanying table. 3 CHAPTER 9 PROBLEMS Quantity of DVDs VC 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 quantity of output. $0 5,000 8,000 9,000 14,000 20,000 33,000 49,000 72,000 99,000 150,000 a. Calculate Bobs average variable cost, average total cost, and marginal cost for each b. There is free entry into the industry: anyone who enters will face the same costs as Bob. Suppose that currently the price of a DVD is $23. What will Bobs profit be? Is this a long-run equilibrium? If not, what will the price of DVD movies be in the long run? 5. Consider Bobs DVD company described in Problem 4. Assume that DVD production is a perfectly competitive industry. In each case, explain your answers. a. What is Bobs break-even price? What is his shut-down price? b. Suppose the price of a DVD is $2. What should Bob do in the short run? c. Suppose the price of a DVD is $7. What is the profit-maximizing quantity of DVDs that Bob should produce? What will his total profit be? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run? 4 CHAPTER 9 PROBLEMS d. Suppose instead that the price of DVDs is $20. Now what is the profit-maximizing quantity of DVDs that Bob should produce? What will his total profit be now? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run? 6. Consider again Bobs DVD company. a. Draw Bobs marginal cost curve. b. Over what range of prices will Bob produce no DVDs in the short run? c. Draw Bobs individual supply curve. 7. a. A profit-maximizing business incurs an economic loss of $10,000 per year. Its fixed cost is $15,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or exit the in long run? b. Suppose instead this business has a fixed cost of $6,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or exit in the long run? 8. Four students have each started companies selling late-night snack deliveries to dorms and student apartment complexes. Each student has estimated her or his individual supply schedule as given in the accompanying table. Quantity supplied by: Delivery charge Aleesha Brent Christine Dominic $1 2 3 4 5 1 3 5 7 9 5 8 11 15 21 3 6 9 12 15 7 12 17 21 23 5 CHAPTER 9 PROBLEMS a. Draw the four individual supply curves. b. Determine the short-run industry supply schedule. Draw the short-run industry supply curve. 9. The first sushi restaurant opens in town. Initially people are very cautious about eating tiny portions of raw fish, as this is a town where large portions of grilled meat have always been popular. Soon, however, an influential health report warns consumers against grilled meat and suggests that they increase their consumption of fish, especially raw fish. The sushi restaurant becomes very popular and its profits increase. a. What will happen to the short-run profits of the sushi restaurant? What will happen to the number of sushi restaurants in town in the long run? Will the first sushi restaurant be able to sustain its short-run profit over the long run? Explain your answers. b. Local steakhouses suffer from the popularity of sushi and start incurring losses. What will happen to the number of steakhouses in town in the long run? Explain your answer. 10. A perfectly competitive firm has the following short-run total cost: Quantity TC 0 1 2 3 4 5 6 $5 10 13 18 25 34 45 6 CHAPTER 9 PROBLEMS Market demand for the firms product is given by the following market demand schedule: Price Quantity demanded $12 10 8 6 4 300 500 800 1,200 1,800 a. Calculate this firms marginal cost and, for all output levels except zero, the firms average variable cost and average total cost. b. There are 100 firms in this industry that all have identical costs to those of this firm. Draw the short-run industry supply curve. In the same diagram, draw the market demand curve. c. What is the market price, and how much profit will each firm make? 11. A new vaccine against a deadly disease has just been discovered. Presently, 55 people die from the disease each year. The new vaccine will save lives, but it is not completely safe. Some recipients of the shots will die from adverse reactions. The projected effects of the inoculation are given in the accompanying table: 7 CHAPTER 9 PROBLEMS Percent of population inoculated Total deaths due to disease Total deaths due to inoculation Marginal benefit per inoculation Marginal cost per Profit inocu- of inoculation lations 0 10 20 30 40 50 60 70 80 90 100 55 45 36 28 21 15 10 6 3 1 0 0 0 1 3 6 10 15 20 25 30 35 __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ a. What are the interpretations of marginal benefit and marginal cost here? Calculate marginal benefit and marginal cost per each 10 percent increase in the rate of inoculation. Write your answers in the table. b. What proportion of the population should optimally be inoculated? c. What is the interpretation of profit here? Calculate the profit for all levels of inoculation. 12. Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. a. A profit-maximizing firm should select the output level at which the difference between the market price and marginal cost is greatest. b. An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short run. I ... View Full Document

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