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Econ211Chapter 08 SolutionsStLouis0405[1]

# Econ211Chapter 08 SolutionsStLouis0405[1] - x h a p t e r 8...

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x h a p t e r 8: Profit Maximization and Competitive Supply EXERCISES I 1. !he data in the following table give information about the price (in dollars) for which a firm can eel1 a unit of output and the total cost of production. a. Fill in the blanks in the table. b. Show what happens to the firm's output choice and profit if the price of the product falls from \$60 to \$60. The table below shows the h ' s revenue and cost for the two prices. At a price of \$60, the fm should produce ten units of output to maximize profit because this is the point closest to where price equals marginal cost without having marginal 106

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Chapter 8: Profit Maximization and Competitive Supply Q TC MC TVC TFC AVC b. If 100 identical firms are in the market, what is the industry supply curve? For 100 firms with identical cost structures, the market supply curve is the horizontal summation of each firm's output at each price. P
cnapter ti: rrortt MUXZmtZUttOn an& competcttue supply 4. Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost of production is given by C = 200 +2 q2, where q is the level of output and C is total cost. (The marginal cost of production is 4q. The fixed cost of production is \$200.) a. If the price of watches is \$100, how many watches should you produce to maximize profit? Profits are maximized where marginal cost is equal to marginal revenue. Here, marginal revenue is equal to \$100; recall that price equals marginal revenue in a competitive market: b. What will the profit level be? Profit is equal to total revenue minus total cost: c. At what minimum price will the firm produce a positive output? A firm will produce in the short run if the revenues it receives are greater than its variable costs. Remember that the firm's short-run supply curve is its marginal cost curve above the minimum of average variable cost. Here, average variable cost is vc 24* ---- - - 24 . Also, MC is equal to 4q. So, MC is greater than AVC for any quantity 4 4 greater than 0. This means that the firm produces in the short run as long as price is positive. 5. Suppose that a competitive firm's marginal cost of producing output q is given by MC(q) = 3 + 2q. Assume that the market price of the firm's product is \$9. a. What level of output will the firm produce? To maximize profits, the firm should set marginal revenue equal to marginal cost. Given the fact that this Grm is operating in a competitive market, the market price it faces is equal to marginal revenue. Thus, the firm should set the market price equal to marginal cost to maximize its profits: b. What is the firm's producer surplus? Producer surplus is equal to the area below the market price, i.e., \$9.00, and above the marginal cost curve, i.e., 3 + 2q. Because MC is linear, producer surplus is a triangle with a base equal to \$6 (9 - 3 = 6).

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Econ211Chapter 08 SolutionsStLouis0405[1] - x h a p t e r 8...

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