Exam 8: Profit Maximization and Competitive Supply

Scenario 8.2: Yachts are produced by a perfectly competitive industry in Dystopia. Industry output (Q) is currently 30,000 yachts per year. The government, in an attempt to raise revenue, places a $20,000 tax on each yacht. Demand is highly, but not perfectly, elastic. -Refer to Scenario 8.2. The result of the tax in the long run will be that

Laura's internet services has the following short-run cost curve: C(q, K) = + rK where q is Laura's output level, K is the number of servers she leases and r is the lease rate of servers. Laura's short-run marginal cost function is: MC(q, K) = . Currently, Laura leases 8 servers, the lease rate of servers is $15, and Laura can sell all the output she produces for $500. Find Laura's short-run profit maximizing level of output. Calculate Laura's profits. If the lease rate of internet servers rise to $20, how does Laura's optimal output and profits change?

Which of the following statements identifies a key difference between condominiums and cooperative housing?

The perfectly competitive firm's marginal revenue curve is

What happens in a perfectly competitive industry when economic profit is greater than zero?

The following table contains information for a price taking competitive firm. Complete the table and determine the profit maximizing level of output (round your answer to the nearest whole number). Total Marginal Fixed Average Total Average Marginal Output Cost Cost Cost Cost Revenue Revenue Revenue 0 5 0 1 7 10 2 11 20 3 17 30 4 27 40 5 41 50 6 61 60

Table 8.1 -Refer to Table 8.1. That the firm is perfectly competitive is evident from its

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1 -Refer to Figure 8.1. At the profit-maximizing level of output, ATC is

Suppose a firm has unavoidable fixed costs of $500,000 per year, and it decides to shut down. What is the firm's producer surplus?

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1 -Refer to Figure 8.1. At 67 units of output, profit is

The market demand for a type of carpet known as KS-12 has been estimated as P = 75 - 1.5Q, where P is price ($/yard), and Q is output per time period (thousands of yards per month). The market supply is expressed as P = 25 + 0.50Q. A typical competitive firm that markets this type of carpet has a marginal cost of production of MC = 2.5 + 10q. a. Determine the market equilibrium price for this type of carpet. Also determine the production rate in the market. b. Determine how much the typical firm will produce per week at the equilibrium price. c. If all firms had the same cost structure, how many firms would compete at the equilibrium price computed in (a) above? d. Determine the producer surplus the typical firm has under the conditions described above. (Hint: Note that the marginal cost function is linear.)

Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error?

In the robotics industry there are 100 firms. Each firm shares the same long-run cost function. It is: C(q) = 100 . The relevant marginal cost function is MC(q) = . Each of the 100 firms produce 64 units. The market demand for robotics is: Q_D = 15,000 - 688P. Calculate the market price at this production level. Also, calculate the profits for a representative firm in the robotics industry. If one firm expanded production to 100 units while the remaining 99 firms kept output at 64 units, what would happen to the market price and profits? Would all firms benefit or lose if every firm expanded output to 100 units?

Ronny's Pizza House operates in the perfectly competitive local pizza market. If the price of pizza cheese increases (ceteris paribus), what is the expected impact on Ronny's profit-maximizing output decision?

The manufacturing of paper products causes damage to a local river when the manufacturing plant produces more than 1,000 units in a period. To discourage the plant from producing more than 1,000 units, the local community is considering placing a tax on the plant. The long-run cost curve for the paper producing firm is: C(q, t) = + tq, where q is the number of units of paper produced and t is the per unit tax on paper production. The relevant marginal cost curve is: MC(q, t) = + t. If the manufacturing plant can sell all of its output for $2, what is the firm's optimal output if the tax is set at zero? What is the minimum tax rate necessary to ensure that the firm produces no more than 1,000 units? How much are the firm's profits reduced by the presence of a tax?

Average cost for the firm in Table 8.1

Following Example 8.8 in the book, the long-run supply of rental housing in most U.S. communities is more inelastic than the long-run supply of owner-occupied housing. Why?

Suppose all firms have constant marginal costs that are the same for each firm in the short run. In this case, the market level supply curve is ________ and producer surplus equals ________:

Under what conditions will a firm's long-run producer surplus exceed their economic rents?

Owners and managers