PSLecture14 - Problem Set for Lecture 14 Intervention in Agricultural Markets Convention and Need Note Those problems identified with a T are

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Problem Set for Lecture 14 : Intervention in Agricultural Markets: Convention and Need [January 19, 2010] Note: Those problems identified with a T are definitely considered for review in the tutorials. T14.1 “In the short run production period, Prudhomme argues that capital [plants and machinery] is a fixed factor input and labour is a variable factor input. Indeed, Prudhomme recognizes this as a version of the identical one variable input model discussed in Lecture 3 where land was a fixed factor and labour was a variable factor. Thus, Prudhomme concludes that the number of firms in a perfectly competitive industry in the short run production period must remain unchanged. However, Pratt does not agree. Pratt suggests that in the short run production period, surely new firms could enter the industry and, alternatively, some firms may wish to leave the industry.” T14.2 “Penelope does not understand the significance of ‘normal profits’ and a normal rate of return. And why, Penelope asks, are normal profits considered to be a fixed cost? After all, Penelope suggests, profits are profits and costs are costs.” T14.3 “Penny argues that when marginal costs for a firm in the short run production period are falling, average variable costs must also be falling. However, Penny continues: if marginal costs are rising, then average variable costs must also be rising.” T14.4 “Peter acknowledges that the average variable cost curve for the firm in the short run is u-shaped. Peter recognizes that the average physical product curve for labour [with capital fixed] for the firm must rise, reach a maximum value and then fall. Peter concludes that the u-shaped average variable cost curve is simply the average physical product curve of labour turned upside down.” Note: Assume that the price of labour is fixed i.e., does not change with respect to changes in the output of the firm. . T14.5 “Paul understands the definition of marginal cost: marginal cost represents the extra cost of producing one more unit of output. Some where Paul has seen the statement that marginal costs only depend upon variable costs. Paul is confused. He wonders why marginal costs do not also depend upon fixed costs.” T14.6 “Pamela hears that a firm in pure [perfect] competition is a price taker. Pamela understands that in pure competition there are hundreds/thousands of small firms all producing the identical product or service, with identical cost curves. Pamela challenges the ‘price-taker’ status of the firm in pure competition. Pamela argues that if one firm [and one firm only] were to increase its production by say 100%, industry output should increase and therefore the industry
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This note was uploaded on 12/22/2010 for the course ECO ECO105 taught by Professor Hare during the Spring '08 term at University of Toronto- Toronto.

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PSLecture14 - Problem Set for Lecture 14 Intervention in Agricultural Markets Convention and Need Note Those problems identified with a T are

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