Economics Problems
Part I
Give an example not mentioned in the book or lesson of an industry from which firms exited because profits were low.
Give an example not mentioned in the book or lesson of an industry into which firms entered because profits were low.
Create a pair of graphs to show an perfectly competitive industry and firm in long-run equilibrium. Put the graphs side by side and use the same vertical scale for both graphs.
The left-hand side should show the supply and demand for the product. The equilibrium price is $25 and the equilibrium quantity is 20 billion units per week.
The right-hand side should show the average total cost, marginal cost, and demand curves facing the individual firm. The profit maximizing quantity is 500 units per week.
How many firms are in the market given the graphs you constructed? Assume that all firms have identical cost curves.
Number of firms = _________
When economic profit equals zero in a perfectly competitive market, in the long run the number of firms
Increases
Decreases
Remains constant
Explain why your answer is correct.
Use the cost data in L16b-IA, Costs. It contains average total cost, average variable cost, and marginal cost for a perfect competitor are output increases from 4 to 18.
Plot the average variable cost, average total cost, and marginal cost curves.
Use the graph to identify the quantity that maximizes profit when the market price is $25.
Shade the area on the graph that equals profit when the market price is $25.
When is the maximum profit greater than $0?
The maximum profit is greater than $0 when the market price is above $_____
Pick a price that is greater than a, your answer to 4, and less than $41. The price must be an even number.
Price = b = $____
Use the table to identify the quantity that maximizes profit when price = b.
Q = ___
Use the table to calculate the maximum profit when price = b. Profit = $____
Is the industry in long-run equilibrium when price = b?
Yes
No
Explain why or why not. If the industry is not in long-run equilibrium, describe what changes would occur in the long run and why.
When will the firm produce output in the short run AND suffer economic loss? Profit will be negative and the firm will not shut down when price is between c = $___ and d = $___.
Pick a price between c and d. The price must be an even number.
Price = e = ____
Use the table to identify the quantity that maximizes profit when price = e.
Q = ___
Use the table to calculate the minimum loss when price = e. Loss = $____
Is the industry in long-run equilibrium when price = e?
Yes
No
Explain why or why not. If the industry is not in long-run equilibrium, describe what changes would occur in the long run and why.
Why doesn't the firm shut down when price = e? Explain your answer carefully.
When will the firm shut down in the short run? The firm will shut down when price is below $___.
What loss does the firm suffer when it shuts down? Loss = ____