Exam 8: Profit Maximization and Competitive Supply

Bud Owen operates Bud's Package Store in a small college town.Bud sells six packs of beer for off-premises consumption.Bud has very limited store space and has decided to limit his product line to one brand of beer,choosing to forego the snack food lines that normally accompany his business.Bud's is the only beer retailer physically located within the town limits.He faces considerable competition,however,from sellers located outside of town.Bud regards the market as highly competitive and considers the current $2.50 per six pack selling price to be beyond his control.Bud's total and marginal cost functions are: TC = 2000 + 0.0005Q² MC = 0.001Q, where Q refers to six packs per week.Included in the fixed cost figure is a $750 per week salary for Bud,which he considers to be his opportunity cost. a.Calculate the profit maximizing output for Bud.What is his profit? Is this an economic profit or an accounting profit? b.The town council has voted to impose a tax of $.50 per six pack sold in the town,hoping to discourage beer consumption.What impact will the tax have on Bud? Should Bud continue to operate? What impact will the tax have on Bud's out-of-town competitors?

In many rural areas,electric generation and distribution utilities were initially set up as cooperatives in which the electricity customers were member-owners.Like most cooperatives,the objective of these firms was to:

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

Several years ago,Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world.This market was not perfectly competitive because this situation violated the:

In the short run,a perfectly competitive profit maximizing firm that has not shut down

In the short run,a perfectly competitive firm earning positive economic 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.)

That Table 8.1 shows a short-run situation is evident from

The demand curve facing a perfectly competitive firm is

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve,the profit maximization condition for the firm can be written as

Consider the following statements when answering this question I.Increases in the demand for a good,which is produced by a competitive industry,will raise the short-run market price. II.Increases in the demand for a good,which is produced by a competitive industry will raise the long-run market price.

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,total profit is

The long-run cost function for Jeremy's Jetski Rentals is: C(q)= q².The long-run marginal cost function is MC(q)= 5q.If Jeremy can sell as many jetski rentals as he desires at $50,calculate his optimal output in the long run.

The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as

The authors note that the goal of maximizing the market value of the firm may be more appropriate than maximizing short-run profits because:

The market demand for a type of carpet known as KP-7 has been estimated as: P = 40 - 0.25Q, where P is price ($/yard)and Q is rate of sales (hundreds of yards per month).The market supply is expressed as: P = 5.0 + 0.05Q. A typical firm in this market has a total cost function given as: C = 100 - 20.0q + 2.0q². a.Determine the equilibrium market output rate and price. b.Determine the output rate for a typical firm. c.Determine the rate of profit (or loss)earned by the typical firm.

Marginal profit is negative when:

In the short run,a perfectly competitive firm earning negative economic profit is

Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes.The market is highly competitive,with boxes currently selling for $100 per thousand.Conigan's total and marginal cost curves are: TC = 3,000,000 + 0.001Q² MC = 0.002Q where Q is measured in thousand box bundles per year. a.Calculate Conigan's profit maximizing quantity.Is the firm earning a profit? b.Analyze Conigan's position in terms of the shutdown condition.Should Conigan operate or shut down in the shortrun?

If a graph of a perfectly competitive firm shows that the MR = MC point occurs where MR is above AVC but below ATC,