Discussion Session 2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity.

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Presentation transcript:

Discussion Session 2

Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity of apples (pounds) Willingness to payMarginal Benefit 0$0 1$7 2$13 3$18 4$22 5$25

Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity of apples (pounds) Willingness to payMarginal Benefit 0$0- 1$77 2$136 3$185 4$224 5$253

Marginal Benefit Let’s draw Abby’s individual demand curve for apples. If the market price of apples is $5/lb, how many pounds of apples will Abby buy? Abby will buy if P<MB, until P = MB, so she will buy 3 lbs of apples. What is her consumer surplus? It is TB – P x Q = 18 – 5 x 3 = 18 – 15 = 3

Marginal Benefit

Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 2) Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 2) Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? The firm produces quantity where P = MC. When MC = $9, Q = 4 QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 3) What is the profit/loss? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 3) What is the firm’s profit/loss? Profit = Total Revenue – Total Cost = P x Q – ATC x Q = 9 x x 4 = 6 QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 4) What is the break-even price? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves

4) What is the break-even price? The break-even price equals to the minimum of ATC = $7 QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 5) What is the shut-down price? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Cost Curves 5) What is the shut-down price? The shut-down price equals to the minimum of AVC = $3.5 QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC)

Deriving the Market Supply Curve Derive the market supply curve QuantityFirm A MC Firm B MC

The Rise and Fall of Industries Suppose that apple farming in the United States can be represented by a competitive industry. Currently the industry is in long run equilibrium. Consider the case of cost-reducing technologies. For examples, scientists develop new high-yield seeds that produce more apples at a lower cost. 1) Explain how the industry would adjust to a decrease in cost of production of apples. 2) Analyze what happens in the short run as well as in the long run.