ECON

Topics: Supply and demand, Economics, Perfect competition Pages: 5 (1309 words) Published: September 22, 2013
1. Determining changes in equilibrium price and quantity for a perfectly competitive industry given changes in demand and/or supply (Ch. 2, p. 60-65; Class Notes) A. Graphical analysis given demand and supply curves

(a) While there is increased awareness of Vitamin C available from orange juice, a hard, freezing winter occurs in most of the orange producing areas. Demand increases while supply decreases.

(b) While the technology used for tobacco production is improving, there is increased awareness of the health effects of smoking. Supply increases while demand decreases.

(c) While there is increased awareness of Vitamin C available from orange juice, highly favorable weather conditions occur in orange producing areas for most the crop season. Both demand and supply increase.

(d) While there is increased awareness of the health effects of smoking, severe drought occurs in tobacco producing areas for most of the crop season. Both demand and supply decrease. 2. Determining the cross-price elasticity of demand between two goods (Ch. 3; p. 85-88, Class Notes)

A. Arc cross-price elasticity, given discrete changes in price and quantity demanded
Exy = [(Qndx - Qodx)/{(Qndx + Qodx)/2}] / [(Pny - Poy)/{( Pny + Poy)/2}]
= [(Qndx - Qodx)/(Qndx + Qodx)] / [(Pny - Poy)/( Pny + Poy)] where, Qndx and Qodx are new and original quantities of good X demanded, and Pny and Poy are new and original prices of good Y.

Suppose, an increase in the price of Pepsi from $0.50 to $0.75 per 8-ounce can increases the average number of 8-ounce can coke demanded per captia per week from 4 to 8. Assuming that all other economic variables were held constant, calculate the arc cross-price elasticity of demand between Pepsi and coke. Exy = [(8 - 4)/(8 + 4)] / [(0.75 - 0.50)/(0.75 + 0.50)]

= (4/12) / (0.25/1.25) = 1.67.

The arc cross-price elasticity coefficient of 1.67 implies that a one-percent increase in the price of Pepsi would lead to a 1.67 percent increase in the quantity demanded of coke and vice versa, within the price range of $0.50 to $0.75. Thus, Pepsi and coke are substitute goods.

In general, Exy > 0 => goods x and y are substitutes whereas Exy < 0 => goods x and y are complements. 1. Adjusting the quantities of inputs to improve productivity and minimize costs based on the rule for optimal input combination (Ch. 5, 173-175) When multiple inputs are considered, the rule for optimal input combination is: MPa/Pa = MPb/Pb = … = MPn/Pn

where MPa, MPb, and MPn are marginal products of inputs a, b, and n whereas Pa, Pb, and Pn are prices of those inputs, respectively.

MPa/Pa measures the units of output per dollar spent on input ‘a.’ Similarly, the ratios for other inputs measure the units of output per dollar spent on each of those inputs. Thus, the rule for optimal input combination is that the units of output per dollar spent on each of the inputs equal to each other.

The MP of an input eventually declines according to the law of diminishing marginal product as the quantity of that input used is increased. Accordingly, the MP curve initially slopes upward, reaches a peak, and then slopes downward when the law of diminishing marginal product is effective. On the downward sloping portion of the MP curve, there is a segment where MP is declining but positive, a point where MP is zero, and finally a segment where MP is declining and negative.

For determining optimal input combination, the decision making segment of the MP curve is where MP is declining but positive. On this segment of the MP curve, there is a negative relationship between the quantity of an input used and its productivity. In other words, if the firm needs to increase the MP of an input, it will use less of the input and if the firm needs to decrease the MP of the input, it will use more of the input. Alternatively, more input means less productivity and less input means more productivity....
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