econ1001_endofchapter06

econ1001_endofchapter06 - Chapter 6 Perfectly competitive...

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Unformatted text preview: Chapter 6 Perfectly competitive supply: the cost side of the market Problem #1, Chapter 6 (1) • Zoe is trying to decide how to divide her time between her job as a wedding photography, which pays $27 per hours for as many hours as she chooses to work, and as a fossil collector, in which her pay depends both on the price of fossils and the number of them she finds. Earnings aside, Zoe is indifferent between the two tasks, and the number of fossils she can find depends on the number of hours a day she researches, as shown in the table below. Problem #1, Chapter 6 (2) Hours per day Total fossils per day 1 5 2 9 3 12 4 14 5 15 Solution to Problem #1 (1) • Derive a table with a price in dollar increments from $0 to $30 in the first column and the quantity of fossils Zoe is willing to supply per day at that price in the second column Solution to Problem #1 (2) • In the first hour, Zoe can collect 5 fossils • If the price of a fossil is $5, Zoe can make a total $25 in an hour if she devotes all her time to collecting fossils, which is less than the money she can earn from photography • Thus, she won’t collect fossil if the price of a fossil is less than $5 • If the price of a fossil is $6 Zoe should devote all her time to photography, as she can make $30 an hour from photography Solution to Problem #1 (3) • An additional hour would yield only 4 additional fossils or $24 additional revenue, so she should not spend any further time looking for fossils • If the price of fossils rises to $7, however, the additional hour gathering fossils would yield an additional $28, so gathering fossils during that hour would then be the best choice, and Zoe would therefore supply 9 fossils per day Solution to Problem #1 (4) Price of fossils ($) # of fossils supplied / day 0 – 5 0 6 5 7, 8 9 9 – 13 12 14 – 26 14 27+ 15 Solution to Problem #1 (5) • Plot these points in a graph with price on the vertical axis and quantity per day on the horizontal. What is this curve called? • The curve will depict a price-quantity supplied relationship for fossils as follows • In other words, it is SUPPLY CURVE for fossils Solution to Problem #1 (6) Chapter 6 Problem 2 A price-taking firm makes air conditioners. The market price of one of their new air conditioners is $120. Its total cost information is given in the table below: How many air conditioners should the firm produce per day if its goal is to maximize its profit? Air conditioners per day Total cost ($ per day) 1 100 2 150 3 220 4 310 5 405 6 510 7 650 8 800 To decide how many air conditioners should produce in order to maximize its profit, we can 1) Apply the cost-benefit principle ,or, 2) Calculate the profit levels and choose the production level that gives the largest profit Method 1: The cost – benefit principle, we know that firm should continue to produce an additional unit of goods as long as the additional benefit to produce the good is at least as great as the additional cost to produce the same good. cost to produce the same good....
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This note was uploaded on 10/14/2010 for the course ECON ECON1001 taught by Professor Ka-fuwong during the Spring '10 term at HKU.

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econ1001_endofchapter06 - Chapter 6 Perfectly competitive...

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