Reference no: EM13373441
1. Los Angeles retail market for widgets is fiercely price competitive. The typical retailer has the following total cost (TC) and marginal cost (MC) relations:
TC = $1562.5 + $1.25Q + $0.00001Q2
MC = dTC/dQ = $1.25 + $0.00002Q
and Q is number of widgets. Total costs include a normal profit.
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A.
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Calculate the firm's profit-maximizing output level assuming the current price of widgets is $1.75. Make sure you explain your work and answers.
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B.
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Explain why the price above is not sustainable in the long run. Explain the adjustment process that would take place to reach long-run equilibrium using supply-demand analysis. As part of your answer, determine the appropriate long-run equilibrium price and output level for the typical retailer.
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3. Indicate whether each of the following statements is true or false, and explain why. If a statement is false or true, do not simply give a corrected statement -- you must provide a full explanation as to why that statement is correct or not.
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A.
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Producer surplus tends to fall as the supply curve becomes more elastic.
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B.
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Consumer surplus tends to rise as demand becomes more elastic.
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C.
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The market demand curve indicates the minimum price buyers are willing to pay at each level of production.
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D.
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The market supply curve indicates the minimum price required by sellers as a group to bring forth production.
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E.
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Consumer surplus is the amount that consumers are willing to pay for a given good or service above and beyond the amount actually paid.
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4. The U. S. wheat crop averages about 2 billion bushels per year, and is about 10 percent of the 20 billion-bushel foreign wheat crop. Typically, the market has a relatively good estimate of the wheat crop from the <?xml:namespace prefix="st1" ns="urn:schemas-microsoft-com:office:smarttags"?>United States</st1:place></st1:country-region> and Canada</st1:place></st1:country-region>, but wheat crops from the Southern Hemisphere are much harder to predict. Argentina</st1:place></st1:country-region>'s wheat acreage varies dramatically from one year to another, for example, and Australia</st1:place></st1:country-region> has hard-to-predict rainfall in key wheat production areas. To illustrate some of the cost in social welfare from agricultural price supports, assume the following market supply and demand conditions for wheat:
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P = $2 + 0.001QS
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(Market Supply)
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P = $4.80 - $0.0004QD
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(Market Demand)
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where Q is output in bushels of wheat (in millions), and P is the market price per bushel.
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A.
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Calculate the equilibrium price/output solution. Explain your answers and show all work.
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B.
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Determine the loss in consumer surplus due imposition of a $4.40 per bushel price support program. Explain your answers well.
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5. Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market?
6. "I really don't get why a perfectly competitive firm wants to produce so that MR = MC. I mean, the goal of the firm is to earn the most profit possible. Why does it produce so that MR = MC? I think that it ought to want to produce so that MR > MC; that is, so that revenues exceed costs and it earns a profit." This student is making a fundamental error. Correct the student's analysis.