MODERNPRINCIPLES:MICROECONOMICS1111MODERNPRINCIPLESOFECONOMICSFacts and Tools1.You’ve been hired as a management consultant to four different companiesin competitive industries. They’re each trying to figure out if they shouldproduce a little more output or a little bit less in order to maximize theirprofits. The firms all have typical marginal cost curves: They rise as the firmproduces more.Your staff did all the hard work for you of figuring out the price of eachfirm’s output and the marginal cost of producing one more unit of outputat their current level of output. However, they forgot to collect data on howmuch each firm is actually producing at the moment. Fortunately, that doesn’tmatter. In your final report, you need to decide which firms should producemore output, which should produce less, and which are producing just theright amount:a.WaffleCo, maker of generic-brand frozen waffles. Price5$4 per box, marginalcost5$2 per box.b.Rio Blanco, producer of copper. Price5$32 per ounce, marginal cost$45 per ounce.c.GoDaddy.com, domain name registry. Price5$5 per website, marginal cost$2 per website.d.Luke’s Lawn Service. Price5$80 per month, marginal cost5$120 per month.1.WhenP.MC, produce more. WhenP,MC, produce less. So produce more inparts a and c, and produce less in parts b and d.55SolutionCosts and Profit MaximizationUnder Competition
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S-2•CHAPTER 11• Costs and Profit Maximization Under Competition2.In the competitive electrical motor industry, the workers at Galt Inc. threaten to goon strike. To avoid the strike, Galt Inc. agrees to pay its workers more. At all otherfactories, the wage remains the same.a.What does this do to the marginal cost curve at Galt Inc.? Does it rise, does itfall, or is there no change? Illustrate your answer in the figure.Price permotorMarginal cost ofmaking motors beforelabor agreementWorld priceof motorsQuantity of motorsper monthb.What will happen to the number of motors produced by Galt Inc.? Indicate the“before” and “after” levels of output on thex-axis in the figure.c.In this competitive market, what will the Galt Inc. labor agreement do to theprice of motors?d.Surely, more workers willwantto work at Galt Inc. now that it pays higherwages. Will more workersactuallywork at Galt Inc. after the labor agreement isstruck? Why or why not?2.a, b.The marginal cost curve will shift up (a shift to the left captures the sameintuition). The number of motors sold will fall.
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