Microeconomics Wa 3

Topics: Economics, Perfect competition, Costs Pages: 6 (1924 words) Published: April 30, 2012
Microeconomics
WA3
1. At its current level of production, a profit-maximizing firm in a competitive market receives \$12.50 for each unit it produces and faces an average total cost of \$10. At the market price of \$12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1000 units. What is the firm's current profit? What is likely to occur in this market, and why? Total rev | 12500|

Total costs | 10000|
TC=ATC(Q) = 10 ( 1000) = 10000
Profit=TR-TC = 12500 - 10000 = 2500
In this case, the profit is positive however for perfectly competitive markets in this situation, there will be zero profits in the long-run. In this market, new firms will enter the market because of the attraction to profits which will increase market supply and reduce equilibrium price until it reaches close to P=\$10, consequently leading to zero economic profits in long-run. In the case where a lower price is forced, this firm will be pressed to reduce output some with the new equilibrium P=MR=MC 2. In order to determine whether time is being spent optimally, a commercial fisherman has recorded the following information over the past year: "hours spent fishing" and "quantity of fish caught." What is the marginal product of fishing for hour spent?

Hours/day| Total Quantity of Fish (tons)| Marginal Product| 0| 0| 0|
1| 10| 10|
2| 18| 8|
3| 24| 6|
4| 28| 4|
5| 30| 2|
6| 31| 1|

3. The fisherman has a fixed cost of \$200 per day and variable costs of \$150 per hour (wages and fuel). a. Fill in the information missing in the following table. Hours/ day| Total Fixed Costs| Total Variable Costs| Total Costs| Marginal Costs| 0| 200| 0| 200| 0|

1| 200| 150| 350| 150|
2| 200| 300| 500| 150|
3| 200| 450| 650| 150|
4| 200| 600| 800| 150|
5| 200| 750| 950| 150|
6| 200| 900| 1100| 150|
b. The fish sell for \$100 a ton. How many hours fishing per day he work in order to earn a maximum profit on his day's activity? And how much is that profit? Please show all your calculations. Fixed Costs per day | 200|

Variable Costs per hour| 150|
Total Costs | (200)(150)(x)|
Selling Price | 100 a ton|
Total Costs/24 Hours | 200+24(150)=3800 |
In this case, the number of hours of fishing required to reach a maximum profit is 5 hours. Once the 5 hours have been exceeded, marginal revenue and profits are reduced as the marginal costs exceed marginal revenue. Hours/Day| Total Costs| Marginal Costs | Total Revenue | Marginal Revenue | Profit| 0| 200| 0| 0| 0| -200|

1| 350| 150| 1000| 1000| 650|
2| 500| 150| 1800| 800| 1300|
3| 650| 150| 2400| 600| 1700|
4| 800| 150| 2800| 400| 2000|
5| 950| 150| 3000| 200| 2050|
6| 1100| 150| 3100| 100| 2000|

4. Under what conditions should a firm shut down production in the short run? Under what conditions should a firm shut down in the long run? Explain the difference between the short and long run conditions. In the short run, firms shut down if the revenue that it would get from producing is less than it’s variable costs of production. In the long run firms exit the market if the revenue it would get from producing is less than it’s total costs. A shutdown is a reference to a short run decision not to produce anything during a specific period of time because of current market conditions. An exit is in reference to a long run decision to leave the market. The difference between short and long run decisions because most firms cannot avoid their fixed costs in the short run but may be able to do this in long run. Another difference is that a firm that decides to shut down temporarily still has to pay it’s fixed costs and a firm that exits the market does not have to pay fixed or variable costs. 5. Define and explain the relationship between total revenue, average revenue, and...

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