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CRC Economics1

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2 Exercises Econ 304 Chapter 13

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CRC Economics3 Do you know … how to calculate different types of profits? how to calculate and graph different revenue curves? how to calculate and graph different product curves? how to calculate and graph different cost curves? how to calculate the profit-maximizing output level?

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CRC Economics4 1. How to calculate profits? Given the information below about a firm: Answer the questions that follow.

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CRC Economics5 Questions to answer How much is total revenue (TR)? Formula: TR = P x Q TR = $25,000 x 10 = $250,000

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CRC Economics6 Questions to answer How much are explicit costs? Hint: Explicit costs = costs that require money outlay Explicit costs = Costs of raw materials + Interest costs of borrowed money Explicit costs = $150,000 + ($300,000x10%) = $180,000

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CRC Economics7 Questions to answer How much are implicit (opportunity) costs? Hint: Implicit costs = costs that do NOT require money outlay Implicit costs = Foregone salary + + Foregone interests on own money Implicit costs = $70,000 + ($100,000x10%) = $80,000

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CRC Economics8 Questions to answer How much are total costs (TC)? Formula: Total costs = Explicit costs + Implicit costs TC = $180,000 + $80,000 = $260,000

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CRC Economics9 Questions to answer How much is accounting profit? Formula: Accounting profit = Total revenue – Explicit costs Accounting profit = $250,000 - $180,000 = $70,000

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CRC Economics10 Questions to answer How much is economic profit ( )? Formula: Economic profit = Total revenue – Total costs Economic profit = = $250,000 - $260,000 = -$10,000

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CRC Economics11 Questions to answer Is the business profitable? Why or why not? Hint: Profitable > 0 The business is NOT profitable, because economic profit = = -$10,000 < 0.

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CRC Economics12 2. How to calculate and graph different revenue curves? Calculating the revenues of a firm in perfect competition (i.e. a perfectly competitive firm). Graph the corresponding revenue curves. Calculating the revenues of a firm in imperfect/no competition. Graph the corresponding revenue curves.

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CRC Economics13 Given the information below about a firm in perfect competition: Answer the questions that follow. a. Perfect competition Q 0 1 2 3 4 5 P $5

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CRC Economics14 Questions to answer Q 0 1 2 3 4 5 P $5 TR Calculate total revenue (TR), where TR = P x Q. $5 $0 $5 $10 $15 $20 $25 Calculate average revenue (AR), revenue per unit, where AR = TR / Q. AR - $5 MR - $5 Calculate marginal revenue (MR), the revenue earned when selling one more unit, where MR = TR / Q.

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CRC Economics15 Questions to answer Q 0 1 2 3 4 5 P $5 TR What are the special features of a firm in perfect competition? $5 $0 $5 $10 $15 $20 $25 1. Price P is fixed, constant, unchanged. AR - $5 MR - $5 2. (P = AR) = MR (D) Special notes: (1) P = AR (always); (2) AR is also the firm’s demand curve (D).

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CRC Economics16 b. Revenue curves of a firm in perfect competition P Q TR = PQ P = AR= MR (D) $5 1 The TR curve is a straight line. It starts from the point of origin and slopes upward. 0 The AR and MR curves are also straight lines. They coincide and are horizontal, starting from the constant price P.

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CRC Economics17 Given the information below about a firm in imperfect/no competition: Answer the questions that follow. Imperfect/no competition Q 0 1 2 3 4 5 P $10 $8 $6 $4 $2 $0

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CRC Economics18 Questions to answer Q 0 1 2 3 4 5 P $10 TR Calculate total revenue (TR), where TR = P x Q. $8 $6 $4 $2 $0 $8 $12 $8 $0 Calculate average revenue (AR), revenue per unit, where AR = TR / Q. AR - $8 $6 $4 $2 $0 MR - $8 $4 $0 -$4 -$8 Calculate marginal revenue (MR), the revenue earned when selling one more unit, where MR = TR / Q.

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CRC Economics19 Questions to answer Q 0 1 2 3 4 5 P $10 TR $8 $6 $4 $2 $0 $8 $12 $8 $0 AR - $8 $6 $4 $2 $0 MR - $8 $4 $0 -$4 -$8 What are the special features of a firm in imperfect/no competition? 1. Price P is variable. To sell more, the firm must lower price. 2. (P = AR) > MR

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CRC Economics20 b. Revenue curves of a firm in imperfect/no competition P Q P = AR (D) $8 5 The TR curve is an upside down parabola, starting from the point of origin. TR is maximized at M. 0 The AR curve is a downward- sloping straight line. TR = PQ M MR The MR curve is also a downward- sloping straight line. When MR = 0, TR is maximized, at Ed = 1. Ed = 1

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CRC Economics21 Given the information below about a firm in the short run: Answer the questions that follow. 3. How to calculate and graph different product curves? L 0 1 2 3 4 5 Q 0 6 11 15 18 20

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CRC Economics22 Questions to answer L 0 1 2 3 4 5 Q 0 6 11 15 18 20 Calculate average product of labor (AP L ), where AP L = Q / L. Calculate marginal product of labor (MP L ), the product/output obtained when hiring one more worker, where MP L = Q / L. AP L - 6.0 5.5 5.0 4.5 4.0 MP L - 6.0 5.0 4.0 3.0 2.0

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CRC Economics23 Questions to answer L 0 1 2 3 4 5 Q 0 6 11 15 18 20 What happens to Q, AP L, and MP L, when L rises? Why? When L rises, i.e. more workers are employed, output Q rises, AP L falls, and MP L falls. AP L - 6.0 5.5 5.0 4.5 4.0 MP L - 6.0 5.0 4.0 3.0 2.0 The principle of diminishing marginal product of labor takes effect. As L rises, MP L falls, and the production function becomes flatter.

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CRC Economics24 Product curves—TP = Q Q L TP = Q M Maximum output Z Zero output R Diminishing return point S Shutdown point Where the law of diminishing returns takes effect. The tangent line goes through the curve. Where a line from the point of origin is tangent to the curve. Relevant section

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CRC Economics25 Product curves—AP & MP Q L AP M Z R S MP Relevant section

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CRC Economics26 Given the information below about a firm in the short run, where Q = output, FC = fixed cost, and VC = variable cost. Answer the questions that follow. 4. How to calculate and graph different cost curves? Q 0 1 2 3 4 5 FC $16 6 7 8 9 10 VC $0 $18 $31 $41 $49 $59 $72 $90 $114 $145 $184

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CRC Economics27 Questions to answer Q 0 1 2 3 4 5 FC $16 6 7 8 9 10$16 VC $0 $18 $31 $41 $49 $59 $72 $90 $114 $145 $184 What is FC at other levels of output? Hint: FC is fixed at all levels of output.

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CRC Economics28 Questions to answer Q 0 1 2 3 4 5 FC $16 6 7 8 9 10$16 VC $0 $18 $31 $41 $49 $59 $72 $90 $114 $145 $184 Calculate total cost, TC, where TC = FC + VC. Calculate average fixed cost, AFC, where AFC = FC / Q. TC $16 $34 $47 $57 $65 $75 $88 $106 $130 $161 $200 Calculate average variable cost, AVC, where AVC = VC / Q. AFC - $16.0 $8.0 $5.3 $4.0 $3.2 AVC - $18.0 $15.5 $13.7 $12.3 $11.8 $2.7$12.0 $2.3$12.9 $2.0$14.3 $1.8$16.1 $1.6$18.4

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CRC Economics29 Questions to answer Q 0 1 2 3 4 5 FC $16 6 7 8 9 10$16 VC $0 $18 $31 $41 $49 $59 $72 $90 $114 $145 $184 Calculate average total cost, ATC, where ATC = TC / Q = AFC + AVC. Calculate marginal cost, MC, the cost of producing one more unit, where MC = VC / Q = TC / Q. TC $16 $34 $47 $57 $65 $75 $88 $106 $130 $161 $200 AFC - $16.0 $8.0 $5.3 $4.0 $3.2 AVC - $18.0 $15.5 $13.7 $12.3 $11.8 $2.7$12.0 $2.3$12.9 $2.0$14.3 $1.8$16.1 $1.6$18.4 ATC - $34.0 $23.5 $19.0 $16.3 $15.0 MC - $18.0 $13.0 $10.0 $8.0 $10.0 $14.7$13.0 $15.1$18.0 $16.3$24.0 $17.9$31.0 $20.0$39.0

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CRC Economics30 Questions to answer Q 0 1 2 3 4 5 FC $16 6 7 8 9 10$16 VC $0 $18 $31 $41 $49 $59 $72 $90 $114 $145 $184 Is there a minimum value for AFC? No, AFC has no minimum. As Q rises, AFC falls. TC $16 $34 $47 $57 $65 $75 $88 $106 $130 $161 $200 AFC - $16.0 $8.0 $5.3 $4.0 $3.2 AVC - $18.0 $15.5 $13.7 $12.3 $11.8 $2.7$12.0 $2.3$12.9 $2.0$14.3 $1.8$16.1 $1.6$18.4 ATC - $34.0 $23.5 $19.0 $16.3 $15.0 MC - $18.0 $13.0 $10.0 $8.0 $10.0 $14.7$13.0 $15.1$18.0 $16.3$24.0 $17.9$31.0 $20.0$39.0

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CRC Economics31 Questions to answer Q 0 1 2 3 4 5 FC $16 6 7 8 9 10$16 VC $0 $18 $31 $41 $49 $59 $72 $90 $114 $145 $184 Is there a minimum value for MC? Yes, the minimum point of MC (point R) occurs where P =$8.0, and Q = 4. MC falls, reaches the minimum, then rises. The MC curve is U-shaped. TC $16 $34 $47 $57 $65 $75 $88 $106 $130 $161 $200 AFC - $16.0 $8.0 $5.3 $4.0 $3.2 AVC - $18.0 $15.5 $13.7 $12.3 $11.8 $2.7$12.0 $2.3$12.9 $2.0$14.3 $1.8$16.1 $1.6$18.4 ATC - $34.0 $23.5 $19.0 $16.3 $15.0 MC - $18.0 $13.0 $10.0 $8.0 $10.0 $14.7$13.0 $15.1$18.0 $16.3$24.0 $17.9$31.0 $20.0$39.0

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CRC Economics32 Questions to answer Q 0 1 2 3 4 5 FC $16 6 7 8 9 10$16 VC $0 $18 $31 $41 $49 $59 $72 $90 $114 $145 $184 Is there a minimum value for AVC? Yes, the minimum point of AVC (point S) occurs where P =$11.8, and Q = 5. AVC falls, reaches a minimum, then rises. The AVC curve is U-shaped. TC $16 $34 $47 $57 $65 $75 $88 $106 $130 $161 $200 AFC - $16.0 $8.0 $5.3 $4.0 $3.2 AVC - $18.0 $15.5 $13.7 $12.3 $11.8 $2.7$12.0 $2.3$12.9 $2.0$14.3 $1.8$16.1 $1.6$18.4 ATC - $34.0 $23.5 $19.0 $16.3 $15.0 MC - $18.0 $13.0 $10.0 $8.0 $10.0 $14.7$13.0 $15.1$18.0 $16.3$24.0 $17.9$31.0 $20.0$39.0

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CRC Economics33 Questions to answer Q 0 1 2 3 4 5 FC $16 6 7 8 9 10$16 VC $0 $18 $31 $41 $49 $59 $72 $90 $114 $145 $184 Is there a minimum value for ATC? Yes, the minimum point of ATC (point B) occurs where P =$14.7, and Q = 6. ATC falls, reaches a minimum, then rises. The ATC curve is U-shaped. TC $16 $34 $47 $57 $65 $75 $88 $106 $130 $161 $200 AFC - $16.0 $8.0 $5.3 $4.0 $3.2 AVC - $18.0 $15.5 $13.7 $12.3 $11.8 $2.7$12.0 $2.3$12.9 $2.0$14.3 $1.8$16.1 $1.6$18.4 ATC - $34.0 $23.5 $19.0 $16.3 $15.0 MC - $18.0 $13.0 $10.0 $8.0 $10.0 $14.7$13.0 $15.1$18.0 $16.3$24.0 $17.9$31.0 $20.0$39.0

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CRC Economics34 Cost curves—FC, VC, and TC $ Q FC VC TC R R S B Point B is where a line from the point of origin is tangent to the TC curve. It is called the breakeven point (in PC). Point S is where a line from the point of origin is tangent to the VC curve. It is called the shutdown point (in PC).

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CRC Economics35 Cost curves—AVC, ATC, and MC $ Q AVC ATC MC R S B

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CRC Economics36 Cost curves (in perfect competition) $ Q AVC ATC MC R S B Pbr Psh Breakeven price Shutdown price

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CRC Economics37 Given the following information for a firm: Answer the questions that follow. 4. How to calculate the profit-maximizing output level, Q*? Q 0 1 2 3 4 5 P $60 6 7 8 9 10$60 TC $30 $42 $66 $102 $150 $210 $282 $366 $462 $570 $690

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CRC Economics38 Questions to answer Q 0 1 2 3 4 5 P $60 6 7 8 9 10$60 TR $0 $60 $120 $180 $240 $300 $360 $420 $480 $540 $600 Calculate TR and economic profit, , where = TR – TC. TC $30 $42 $66 $102 $150 $210 $282 $366 $462 $570 $690 -$30 $18 $54 $78 $90 MR - $78 $54 $18 -$30 -$90 MC - $12 $24 $36 $48 $60 MM - $48 $36 $24 $12 $0 $72-$12 $84-$24 $96-$36 $108-$48 $120-$60 $60 Calculate MR, MC, and M , where M = MR – MC.

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CRC Economics39 Questions to answer Q 0 1 2 3 4 5 P $60 6 7 8 9 10$60 TR $0 $60 $120 $180 $240 $300 $360 $420 $480 $540 $600 What is the profit-maximizing output level, Q*? TC $30 $42 $66 $102 $150 $210 $282 $366 $462 $570 $690 -$30 $18 $54 $78 $90 MR - $78 $54 $18 -$30 -$90 MC - $12 $24 $36 $48 $60 MM - $48 $36 $24 $12 $0 $72-$12 $84-$24 $96-$36 $108-$48 $120-$60 $60 Hint: Q* is produced where M = 0, or MR = MC. Q* = 5, where = $90, and MR = MC = $60.

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CRC Economics40 Graphical approach $ Q MC MR Q* E Q* is found on the quantity axis where MR = MC.

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CRC Economics41 Now you know … how to calculate different types of profits. how to calculate and graph different revenue curves. how to calculate and graph different product curves. how to calculate and graph different cost curves. how to calculate the profit-maximizing output level.

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CRC Economics42

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