The table below shows the total costs faced by Allura's Little Robotics Company for different quantities of Good S sold. Quantity | Total Cost --- | --- 0 | $100 1 | $136 2 | $180 3 | $228 4 | $280 5 | $336 6 | $396 7 | $460 8 | $528 9 | $600 10 | $680 Allura's Little Robotics Company sells Good S in a perfectly competitive market with a downward-sloping demand curve and an upward-sloping supply curve. The market price is $62 per unit. (a) Calculate the average fixed cost of producing 2 units. Show your work. (b) Identify the profit-maximizing quantity. Explain using marginal analysis. (c) Calculate the economic profit at the profit-maximizing quantity you identified in part (b). Show your work. (d) Based on your answer to part (c), will the number of firms in the industry increase, decrease, or stay the same in the long run? Explain. (e) Based on your answer to part (c), will the market price increase, decrease, or stay the same in the long run? Explain. (f) The income elasticity of demand for Good S is -0.5, and the cross-price elasticity of demand for toy robots with respect to the price of Good S is 0.8. Based on your answer to part (e), what will happen to the demand for toy robots? Explain. (g) Now assume that the market in which Allura's Little Robotics Company operates is in long-run equilibrium at a price of $65 per unit. (i) Suppose shipping costs per order for Allura's Little Robotics Company decrease. Will the profit-maximizing quantity of Good S for Allura's Little Robotics Company increase, decrease, or stay the same in the short run? Explain. (ii) Instead suppose the government imposes a price ceiling of $60 on the market for Good S. Will total economic surplus in the market for Good S increase, decrease, or stay the same in the short run as a result of the price ceiling? Explain.
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Since the total cost when producing 0 units is $100, this is the fixed cost. The average fixed cost is the fixed cost divided by the quantity produced. So, for 2 units: Average Fixed Cost = Fixed Cost / Quantity = $100 / 2 = $50 Show more…
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Assume the following cost data are for a purely competitive producer: $$\begin{array}{ccccc} \hline \begin{array}{c} \text { Total } \\ \text { Product } \end{array} & \begin{array}{c} \text { Average } \\ \text { Fixed cost } \end{array} & \begin{array}{c} \text { Average } \\ \text { Variable cost } \end{array} & \begin{array}{c} \text { Average } \\ \text { Total cost } \end{array} & \begin{array}{c} \text { Marginal } \\ \text { cost } \end{array} \\ \hline 0 \\ 1 & \$ 60.00 & \$ 45.00 & \$ 105.00 & \$ 45 \\ 2 & 30.00 & 42.50 & 72.50 & 40 \\ 3 & 20.00 & 40.00 & 60.00 & 35 \\ 4 & 15.00 & 37.50 & 52.50 & 30 \\ 5 & 12.00 & 37.00 & 49.00 & 35 \\ 6 & 10.00 & 37.50 & 47.50 & 40 \\ 7 & 8.57 & 38.57 & 47.14 & 45 \\ 8 & 7.50 & 40.63 & 48.13 & 55 \\ 9 & 6.67 & 43.33 & 50.00 & 65 \\ 10 & 6.00 & 46.50 & 52.50 & 75 \\ \hline \end{array}$$ a. At a product price of $\$ 56,$ will this firm produce in the short run? Why or why not? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? Explain. What economic profit or loss will the firm realize per unit of output? b. Answer the relevant questions of 4 a assuming product price is $\$ 41$ c. Answer the relevant questions of 4 a assuming product price is $\$ 32$ d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2 ) and indicate the profit or loss incurred at each output (column 3). $$\begin{array}{cccc} \hline \begin{array}{c} \text { (1) } \\ \text { Price } \end{array} & \begin{array}{c} \text { (2) } \\ \text { Quantity } \\ \text { Supplied, } \\ \text { Single Firm } \end{array} & \begin{array}{c} \text { (3) } \\ \text { Profit }(+) \\ \text { or Loss }(-) \end{array} & \begin{array}{c} \text { (4) } \\ \text { Quantity } \\ \text { Supplied } \\ 1500 \text { Firms } \end{array} \\ \hline \$ 26 & \text {_____} & \$ \text {_____} & \text {_____} \\ 32 & \text {_____} & \text {_____} & \text {_____} \\ 38 & \text {_____} & \text {_____} & \text {_____} \\ 41 & \text {_____} & \text {_____} & \text {_____}\\ 46 & \text {_____} & \text {_____} & \text {_____} \\ 56 & \text {_____} & \text {_____} & \text {_____} \\ 66 & \text {_____} & \text {_____} & \text {_____} \\ \hline \end{array}$$ e. Explain: "That segment of a competitive firm's marginalcost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm." Illustrate graphically. f. Now assume that there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4). g. Suppose the market demand data for the product are as follows: $$\begin{array}{|cc|} \hline \text { Price } & \begin{array}{c} \text { Total Quantity } \\ \text { Demanded } \end{array} \\ \hline \$ 26 & 17,000 \\ 32 & 15,000 \\ 38 & 13,500 \\ 41 & 12,000 \\ 46 & 10,500 \\ 56 & 9500 \\ 66 & 8000 \\ \hline \end{array}$$ What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run?
Assume that a business firm finds that its profit is greatest when it produces $\$ 40$ worth of product A. Suppose also that each of the three techniques shown in the table to the right will produce the desired output. a. With the resource prices shown, which technique will the firm choose? Why? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? When will that expansion or contraction end? b. Assume now that a new technique, technique $4,$ is developed. It combincs 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? Explain your answer. c. Suppose that an increase in the labor supply causes the price of labor to fall to $\$ 1.50$ per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? Explain. d. "The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible." Evaluate this statement. Does your answer to part $c$, above, bear out this contention? Explain. CAN'T COPY THE TABLE
Assume that a business firm finds that its profit is greatest when it produces $\$ 40$ worth of product A. Suppose also that each of the three techniques shown in the following table will produce the desired output. a. With the resource prices shown, which technique will the firm choose? Why? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? When will that expansion or contraction end? b. Assume now that a new technique, technique $4,$ is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? Explain your answer. c. Suppose that an increase in the labor supply causes the price of labor to fall to $\$ 1.50$ per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? Explain. d. "The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible." Evaluate this statement. Does your answer to part $c,$ above, bear out this contention? Explain.
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