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CRC Economics1

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2 Exercises Econ 304 Chapter 14

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CRC Economics3 Do you know … how to determine the profit-maximizing output Q* of a perfectly competitive firm (in a table of data)? how to determine important information about a perfectly competitive firm (on a graph)? how to determine the profit of a perfectly competitive firm (on a graph)?

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CRC Economics4 1. Determining Q* in a table Q 0 TR ? TC $3 ? MRMC MM Should the firm produce this unit? (Yes/No) Given the following information about a perfectly competitive firm. Assume that P = $5. Replace the ?’s with correct values. 1?$5????? 2?$8????? 3?$12????? 4?$17????? 5?$23????? 6?$30????? 7?$38????? $0 $5 $10 $15 $20 $25 $30 $35 -$3 $0 $2 $3 $2 $0 -$3 $5 $2$3Yes $3$2Yes $4$1Yes $5$0Yes $6-$1No $7-$2No $8-$3No How much is the profit-maximizing output Q*, where MR = MC? How much is the profit? 4$5 $0$3

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CRC Economics5 Determining Q*? In the previous problem, what will be Q* and if P = $4? Q* = 3, where P = MR = $3 = MC. = $0. P = $6? Q* = 5, where P = MR = $6 = MC. = $7. P = $7? Q* = 6, where P = MR = $7 = MC. = $12.

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CRC Economics6 2. Determine important information on a graph Given the following information about a perfectly competitive firm. Replace the ?’s with correct labels. 1b? 3a? 3b? 1a? 2a? 2b? MC R AVC S ATC B How much is the shutdown price, Psh? The breakeven price, Pbr? Psh Pbr Determine the areas where > 0, = 0, < 0; and shutdown area. > 0 < 0 P > ATC P < ATC P = ATC = 0 Shutdown area

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CRC Economics7 2. Determine important information on a graph At what prices should the firm produce? At what prices should it shut down? 1b? 3a? 3b? 1a? 2a? 2b? MC R AVC S ATC B The firm should produce as long as P > Psh = $8. The firm should shut down if P =< Psh = $8. Psh Pbr > 0 = 0 < 0 P > ATC P = ATC P < ATC

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CRC Economics8 2. Determine important information on a graph What is the firm’s SR supply? LR supply? 1b? 3a? 3b? 1a? 2a? 2b? MC R AVC S ATC B The firm’s SR supply curve is the MC curve starting from point S. Psh Pbr > 0 = 0 < 0 P > ATC P = ATC P < ATC S SR S LR The firm’s LR supply curve is the MC curve starting from point B.

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CRC Economics9 2. Determining on a graph The diagram shows information about a perfectly competitive firm. Label all curves, lines, and points. (Replace the ?’s with labels.) 1?2?3? 4? 5? 6? MCATCAVC P=AR=MR B S

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CRC Economics10 2. Determining on a graph Determine the profit-maximizing output Q*? Explain. MCATCAVC P=AR=MR E Q* At E, MR = MC So Q* = 4,000

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CRC Economics11 2. Determining on a graph Determine the total revenue TR = P x Q on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = ($11 x 4,000) = $44,000 P = $11

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CRC Economics12 2. Determining on a graph Determine the variable cost VC = AVC x Q on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = ($11 x 4,000) = $44,000 AVC = $6 VC = ($6 x 4,000) = $24,000

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CRC Economics13 2. Determining on a graph Determine the fixed cost FC = AFC x Q on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = ($11 x 4,000) = $44,000 AFC = $2 VC = ($6 x 4,000) = $24,000 FC = ($2 x 4,000) = $8,000

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CRC Economics14 2. Determining on a graph Determine the total cost TC = VC + FC on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = ($11 x 4,000) = $44,000 VC = ($7 x 4,000) = $28,000 FC = ($2 x 4,000) = $8,000 TC = ($8 x 4,000) = $32,000 = $8,000 + $24,000 ATC = $8

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CRC Economics15 2. Determining on a graph Determine the profit = TR - TC on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = ($11 x 4,000) = $44,000 VC = ($7 x 4,000) = $28,000 FC = ($1 x 4,000) = $4,000 A = $3 = $44,000 - $32,000 = $12,000 = $3 x $4,000 TC = ($8 x 4,000) = $32,000 = $8,000 + $24,000

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CRC Economics16 Now you know … how to determine the profit-maximizing output Q* of a perfectly competitive firm (in a table of data). how to determine important information about a perfectly competitive firm (on a graph). how to determine the profit of a perfectly competitive firm (on a graph).

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CRC Economics17

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