(1)The USA Air Crop makes fighter jets, but competes with the French for the world market. The government of the USA wants to “smash” the competition so it decides on a subsidy to USA Air so that USA Air can change a below equilibrium price for its jets on the world markets. Show:
A – the equilibrium Q and P for USA Air jets before the subsidy
B – the equilibrium Q and P for USA Air jets after the subsidy
C – the minimum subsidy that the government of the USA would have to give USA Air to get to the Q and P you have in B above(5)
Marginal revenue is the addition to a firm’s total revenue when the firm produces one additional unit of output and sells this unit of output at the market price. Knowing that MR = dTR/dq, prove that the marginal revenue to the firm is usually below but at under what specific conditions equal to the average revenue (AR) of the firm.
Given your answer above, what must we know about the price elasticity of demand on the demand curve when a firm lowers in price in order for total revenue (TR) to
(a) rise, (b) pretty much stay the same, or (c) fall? Why? (6)
Your firm faces a short run average cost curve SRAC that has an average cost per unit of output at $6.00 at its minimum point. Your firm faces a demand curve that falls below the minimum point of the SRAC. What should the firm do in the short run?
If the firm follows your advice in the short run, what is the firm maximizing or minimizing?
Show with a diagram what the firm is maximizing or minimizing.
If the demand curve remains where it is, what should the firm do in the long run?
In the REAL WORLD, if in the long run, the firm wants to be successful, what two main choices does it have? (7)
What is economic efficiency?
What is “dynamic efficiency”? How would you show the development of dynamic efficiency on a competitive firm’s cost structure?
If the price-taking firm was earning zero economic profits before the dynamic efficiency, will the level of profits change after? If so, show the extent of the change.
If all price-taking firms have access to the dynamic efficiency, what will happen to the firm’s profits in the Long Run?