{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}


Chapter%207%20Practice%20B%20-%20Answers - Chapter 7...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 7 Practice B - Answers 1. The Denton Family Restaurant produces hamburgers in a competitive market. The current market price of hamburgers if $6, the firm sells 1000 hamburgers per month, and is making $0 in profit. Their cost curves have the usual U-shapes, and all firms are identical. a. Graph these cost curves and then describe their hamburger supply function in as much detail as possible. (that is, explain why the q S is what it is, from a price of $0 to a price of $10; at least identify and describe key features of supply as the price rises) q In the short run, at prices above AVC, the firm’s MC curve tells the firm the profit- maximizing level of output to supply. Once price drops below the minimum of AVC, the firm shuts down and q S =0. b. Now assume a $2 excise tax is imposed on hamburgers. Explain the effect of this tax on the firm and the hamburger market in the short run and the long run. This tax increases the firm’s MC curve by $2 at each quantity. Both ATC and AVC rise by $2 per unit. Since this causes each firm’s supply curve to shift to the left, industry supply will also shift to the left. Although price in the market will rise, the increase will be less than $2 and firms will suffer losses. In the long run, firms will exit the industry until prices rise to the point where profits = 0. If this is a constant cost industry, industry price will be $2 higher than before the tax was instituted. c. Now assume that instead of the tax in part “b” above, the city levies a $2000 monthly tax on restaurants. The tax has been assessed on their restaurant and cannot be avoided for one year. What effect will this have on the firm and on the market for hamburgers? This tax does not affect the MC curve, so firms will not change their behavior in the short run (the tax is sunk, so there is no way to avoid it by shutting down). The market will be unaffected, although firms will be losing $2000 per month (remember, profit=0 before the tax). In the long run, some firms will exit until prices rise such that the remaining firms generate enough extra revenue that profits return to zero. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2. Basketballs are produced in a competitive industry where all firms are identical (same exact technology and cost curves). The firm’s costs are illustrated below, as well as market demand for the industry. Representative Firm Costs Market Demand Q MC TVC AVC TC ATC P Q 0 $0 $40 $0 700 1 $30 30 $30 70 $70 10 500 2 20 50 25 90 45 20 380 3 30 80 26.7 120 40 30 300 4 40 120 30 160 40 40 240 5 50 170 34 210 22 50 200 6 60 230 38.3 270 35 60 180 a. Assuming firms in this industry are all earning a zero economic profit, what is the price of a
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}