Answers to Study Questions Set 7

Answers to Study Questions Set 7 - Answers to Study...

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Answers to Study Questions Set 7 Page 200 Question 7 ( Key Question ) In long-run equilibrium, P = minimum ATC = MC. Of what significance for economic efficiency is the equality of P and minimum ATC? The equality of P and MC? Distinguish between productive efficiency and allocative efficiency in your answer. The equality of P and minimum ATC means the firms is achieving productive efficiency; it is using the most efficient technology and employing the least costly combination of resources. The equality of P and MC means the firms is achieving allocative efficiency; the industry is producing the right product in the right amount based on society’s valuation of that product and other products. Page 200 Question 8 Suppose that perfectly competitive firms producing cashews discover that P exceeds MC. Will their combined output of cashews be too little, too much, or just right to achieve allocative efficiency? In the long run, what will happen to the supply of cashews and the price of cashews? Use a supply and demand diagram to show how that response will change the combined amount of consumer surplus and producer surplus in the market for cashews. The combined output is too little to achieve allocative efficiency. The marginal benefit of producing more cashews (as measured by P) exceeds the cost of the resources necessary to produce them. In the long run, the supply will increase as firms enter (or expand) to capture the economic profits being earned. The increase in supply will reduce the price of cashews. Refer to Figure 7.8b, ignoring D 1 . The increase in supply from S 1 to S 2 unambiguously increases the combined area under the demand curve and above the supply curve (consumer surplus and producer surplus, respectively). Page 225 Question 4 ( Key Question ) Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot the demand, total-revenue, and marginal-revenue curves and explain the relationships between them. Explain why the marginal revenue of the fourth unit of output is $3.50, even though its price is $5.00. Use Chapter 5’s total-revenue test for price elasticity to designate the elastic and inelastic segments of your graphed demand curve. What generalization can you make regarding the relationship between marginal revenue and elasticity of demand? Suppose that somehow the marginal cost of successive units of output were zero. What output would the profit-seeking firm produce? Finally, use your analysis to explain why a monopolist would never produce in the inelastic region of demand.
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Price Quantity Demanded Price Quantity Demanded $7.00 6.50 6.00 5.50 5.00 0 1 2 3 4 $4.50 4.00 3.50 3.00 2.50 5 6 7 8 9 Total revenue, in order from Q = 0: 0; $6.50; $12.00; $16.50; $20.00; $22.50; $10-00; $10-50; $10-00; $22.50. Marginal revenue in order from Q = 1: $6.50; $5.50; $4.50; $3.50; $2.50; $1.50; $.50; - $1.50. See the accompanying graph. Because TR is increasing at a diminishing rate, MR is declining. When TR turns downward, MR becomes negative.
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This note was uploaded on 10/13/2009 for the course ECON 1220 taught by Professor Evans during the Winter '08 term at Langara.

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Answers to Study Questions Set 7 - Answers to Study...

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