In short run equilibrium a firm can make an economic

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Unformatted text preview: st, a firm’s supply curve runs along the y-axis; at prices above minimum average variable cost, a firm’s supply curve is its marginal cost curve. Working Problems 4 to 7 will give you a better understanding of a firm’s output decision. Working Problems 10 and 11 will give you a better understanding of output, price, and profit in the long run. Changing Tastes and Advancing Technology s s s Working Problems 12 to 16 will give you a better understanding of changing tastes and advancing technologies. s (pp. 202–205) s s A permanent decrease in demand leads to a smaller market output and a smaller number of firms. A permanent increase in demand leads to a larger market output and a larger number of firms. The long-run effect of a change in demand on price depends on whether there are external economies (the price falls) or external diseconomies (the price rises) or neither (the price remains constant). New technologies increase supply and in the long run lower the price and increase the quantity. Competition and Efficiency (pp. 212–213) Output, Price, and Profit in the Short Run s Economic profit induces entry and economic loss induces exit. Entry increases supply and lowers price and profit. Exit decreases supply and raises price and profit. In long-run equilibrium, economic profit is zero. There is no entry or exit. (pp. 208–211) The Firm’s Output Decision (pp. 198–201) s s The market supply curve shows the sum of the quantities supplied by each firm at each price. Market demand and market supply determine price. A firm might make a positive economic profit, a zero economic profit, or incur an economic loss. Working Problems 8 and 9 will give you a better understanding of output, price, and profit in the short run. s Resources are used efficiently when we produce goods and services in the quantities that people value most highly. Perfect competition achieves an efficient allocation. In long-run equilibrium, consumers pay the lowest possible price and marginal social benefit equals marginal social cost. Working Problems 17 and 18 will give you a better understanding of competition and efficiency. Key Terms External diseconomies, 209 External economies, 209 Long-run market supply curve, 209 Marginal revenue, 196 Perfect competition, 196 Price taker, 196 Short-run market supply curve, 202 Shutdown point, 200 Total revenue, 196 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 217 S tudy Plan Problems and Applications 217 STUDY PLAN PROBLEMS AND APPLICATIONS You can work Problems 1 to 18 in MyEconLab Chapter 10 Study Plan and get instant feedback. What Is Perfect Competition? (Study Plan 10.1) Use the following information to work Problems 1 to 3. Lin’s makes fortune cookies that are identical to those made by dozens of other firms, and there is free entry in the fortune cookie market. Buyers and sellers are well informed about prices. 1. In what type of market does Lin’s operate? What determines the price of fortune cookies and what determines Lin’s marginal revenue from fortune cookies? 2. a. If fortune cookies sell for $10 a box and Lin’s offers its cookies for sale at $10.50 a box, how many boxes does it sell? b. If fortune cookies sell for $10 a box and Lin’s offers its cookies for sale at $9.50 a box, how many boxes does it sell? 3. What is the elasticity of demand for Lin’s fortune cookies and how does it differ from the elasticity of the market demand for fortune cookies? The Firm’s Output Decision (Study Plan 10.2) Use the following table to work Problems 4 to 6. Pat’s Pizza Kitchen is a price taker. Its costs are Output Total cost (pizzas per hour) (dollars per hour) 0 1 2 3 4 5 10 21 30 41 54 69 4. Calculate Pat’s profit-maximizing output and economic profit if the market price is (i) $14 a pizza. (ii) $12 a pizza. (iii) $10 a pizza. 5. What is Pat’s shutdown point and what is Pat’s economic profit if it shuts down temporarily? 6. Derive Pat’s supply curve. 7. The market for paper is perfectly competitive and there are 1,000 firms that produce paper. The table sets out the market demand schedule for paper. Price Quantity demanded (dollars per box) (thousands of boxes per week) 3.65 500 5.20 450 6.80 400 8.40 350 10.00 300 11.60 250 13.20 200 Each producer of paper has the following costs when it uses its least-cost plant: Output Marginal cost (boxes per week) (dollars per additional box) Average variable cost Average total cost (dollars per box) 200 6.40 7.80 12.80 250 7.00 7.00 11.00 300 7.65 7.10 10.43 350 8.40 7.20 10.06 400 10.00 7.50 10.00 450 12.40 8.00 10.22 500 20.70 9.00 11.00 a. What is the market price of paper? b. What is the market’s output? c. What is the output produced by each firm? d. What is the economic profit made or economic loss incurred by each firm? Output, Price, and Profit in the Short Run (Study Plan 10.3) 8. In Problem 7, as more and more computer users read documents online rather than print them, the market demand for paper decreases and in the short run the d...
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This note was uploaded on 01/10/2013 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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