Tutmemo201_2018_8(Section 5.docx

# Tutmemo201_2018_8(Section 5.docx - Tut 8 Ch5 2018 Please...

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Tut 8: Ch5 2018 Please split the tut as follows: 20 minutes for Exercises from chapter 5. There are two things here. The calculation and the industry dynamic. There isn’t time to go through multiple examples. And 20 minutes for the essay comprehension. Get student so ‘peer assess’ get everyone to pass their work to the person to there left (skipping people who haven’t done it). Then take students through the exercise (see below) and get them to give an overall comment on their peer’s work and then return it. Exercise 5.2 (all parts), Exercise 5.3; essay exercise. The keys to all of this: equilibrium at the firm and industry levels. Overall equilibrium is when both firm and industry are in equilibrium. These are two of the three ‘dimensions’ that we use to model market structure. In a competitive market, P=MR (firms are price takers ) so P=MC (firm level) and P=AC (because there are not barriers to entry—any profits or losses will attract entry or exit. To model different market structures, we simply have different properties along these dimensions (hence basis above). Exercise 5.2: i. (Not done in tuts, see end of document) Exercise 5.2 (cont.) Normally we try to use ‘simplified’ models with ‘nice’ numbers to get the point across elegantly. For example … ii. Imagine a firm faces a cost function TC = 1 + X and a demand curve P = 2-X a) The firm’s marginal cost is …. b) The firm’s average cost is ….. c) The firm’s marginal revenue is …. d) Is the firm operating in a perfectly competitive market? Explain …. e) The firm’s profit maximising output is …. f) The firm’s profit maximising price is …. g) Plot the firm’s demand curve, marginal revenue curve, marginal cost curve, and equilibrium price and output on a diagram. h) The firm’s profit is ….. i) The price elasticity of demand at the profit maximising (X,P) equilibrium is …. Note: before we start, what are we doing? READ PAGE 181-3. We are using the idea that the firm MAXIMISES profits in order to model what it does. Profit is always max where MC=MR (see page 181-2). So, we find the TR and TC schedule then differentiate to get MR and MC a) In this case: MC = dTC/dX = 1, b) AC = TC/X = 1/X + 1; c) TR =P.X = (2-X)X = 2X-X 2 so dTR/dX = 2-2X. d) No. The demand curve is not horizontal . The firm is not a price taker (explain well). e) MR = MC : from above. MC =1, MR = 2-2X so 1=2-2X 2X = 1, X = 0.5 (draw it to confirm—part g) f) P = 2-X (given), so P=2-0.5 = 1.5 g) draw diagram h) profit = TR – TC. TR = PX = 1.5x0.5=0.75; TC = 1+0.5. The firm makes a LOSS of 0.75. i. [DON’T do this one intuts) Elasticity is = dX/X ÷ dP/P. Rearrange to (dX/dP)xP/X. dP/dX is the slope, and it 1, so elasticity is P/X in this case. = 1.5/0.5 =3 iii. Imagine a firm is a price-taker and faces a market price of R2 per unit at all levels of output a) Using the formula P = a-bX, what are the values of a and b?

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