Homework5_soln

Homework5_soln - Economics 1A Professor Scott E. Carrel]...

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Unformatted text preview: Economics 1A Professor Scott E. Carrel] Homework 5 (Due in class Feb 20th) 1. Multiple Choice Questions I. At present output levels, a perfectly competitive firm is producing 2000 units of output, selling for $1 each. Fixed costs are $2000, as are total variable costs. If marginal cost is $.50, then in order to profit maximize, thisfirm a) shut down immediately b) reduce output, but stay in business in the short run @ increase output ) continue to produce 2000 units in the short run 2. and 3. Initially, a perfectly competitive, decreasing cost industry, is in long run equilibrium. The industry demand curve shifts left and remains permanently at the new position. 2. In the short—run industry equilibrium following this decrease in demand a both price and quantity are higher than they were initially. {3) both price and quantity are lower than they were initially. c) price is higher than it was initially, but the quantity sold is lower. d) price is lower than it was initially, and the quantity sold is higher. 3. When long—run industry equilibrium is restored following this decrease in demand a) both price and quantity are higher than they were initially. b) both price and quantity are lower than they were initially. @price is higher than it was initially, but the: quantity sold is lower. ) price is lower than it was initially, and the quantity sold is higher. 4. Suppose a perfectly competitive firm is producing 5000 units of output and has total revenues of $1 0, 000. If this is a long run equilibrium, which of the following will be true a) total cost is $5000 @ marginal cost is $2 c) minimum average total cost is $1 d) all of the above 11. Short Answer Using the chart from Homework 4, showing the labor and associated research report output in the UC Davis economics department, answer the following questions with the new market information below. Market Demand: Q = 100,000 — 300P Market Supply: Q = 100P 1. What is the Market Price and Quantity? 100,000 — 300P=100P P=$250 Q=25,000 2. Assuming a Perfectly Competitive Market, how many reports does the Economics Department produce? P=MR=250 MR=MC MC=250 as we move from 18 to 22 reports. Therefore, we produce 22 reports. 3. Graph the Econ Department’s demand and supply curves. 4. What are the Econ Department’s short run profits? Profits=TR-TC TR: 22*250=5,500 TC=6,500 Profits: —l,000 5. What would expect to happen in the long run? Go out of business! III. In-Depth Problems 1. Suppose that sugar is produced in a perfectly competitive constant cost industry. The diagrams below show short-run supply and demand for the industry as a whole, and the marginal cost curve for a representative sugar producer. sugar IndUSU'Y Representative Sugar Producer 100 ,000's of tons sugar tons of sugar a) To the firm diagram, add the demand and MR curves faced by the firm. Assuming that this is a long run equilibrium, add the long run industry supply curve to the industry diagram. How many tons of sugar is each firm producing? What is average total cost at this quantity? Briefly explain how you obtained your answers. MR 3’ “57. so each tirm produces Lit} tons. Hucuusc it is a constant cost industry. the l/litfi is also tlztt ut $7. Alt," $7 because pmfits are 7cm in the long—run. b) Suppose that consumers decide to cut back on sugar consumption for health reasons, and will buy 10 less 100,000's of tons of sugar at any given price than before. Assuming that this firm wants to continue producing in the short run, how many tons of sugar will the firm produce, and at what price? Briefly explain how you obtained your answers. lite demand utrw sitit‘ts tn the lclt by 10 tons. industr} ntttpttt will sltrirtlx to upotortimtzttuly .77? 100.000 tons tll'lti twice tails to $6.50. At this prim the firm prodttct‘, Iii tart» c) Briefly describe how the sugar industry will move to a new long run equilibrium. Pay particular attention to exit and entry of firms, change in quantity produced by the firm, movements of firms' cost curves and demand curves and movements of industry supply curves. Be sure to indicate how many tons of sugar the industry will produce and at what price it will be sold in the new LR equilibrium? mix.» the firms are losing money. they start to exit in thc long run. As firms wit. the in tt‘t».-.:t mlmli} tsur‘x'c stutts to the lctt and the price starts to rise. Since this is a constant tlitiit‘illj. 2hr: cost curses stay put. /cro profits Ltt‘t} t‘cttclml when the prim: returtm to ‘37 and iirms stop exiting. lach firm is back to making 3t) tons. but lllt.‘ industry is only producing; it) lttt‘htttlt) tons with tow tirrm. ...
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Homework5_soln - Economics 1A Professor Scott E. Carrel]...

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