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#### Dalhousie university – ECON 2200 Solutions to Chapter 9 Questions 1)What is the difference between accounting profit and economic profit? How could a firm earn positive accounting profit but negative economic profit?     2

###### Economics

Dalhousie university – ECON 2200

Solutions to Chapter 9 Questions

1)What is the difference between accounting profit and economic profit? How could a firm earn positive accounting profit but negative economic profit?

2.  Why is the marginal revenue of a perfectly competitive firm equal to the market price?

3.  Would a perfectly competitive firm produce if price were less than the minimum level of average variable cost? Would it produce if price were less than the minimum level of short-run average cost?

4.  What is the shutdown price when all fixed costs are sunk? What is the shutdown price when all fixed costs are nonsunk?

5.  Explain the difference between the following concepts: producer surplus, economic profit, and economic rent.

Problem Questions

6. A competitive, profit-maximizing firm operates at a point where its short-run average cost curve is upward sloping. What does this imply about the firm’s economic profits? Briefly explain.

7. Dave’s Fresh Catfish is a northern Mississippi farm that operates in the perfectly competitive catfish farming industry. Dave’s short-run total cost curve is STC(Q) = 400 + 2Q + 0.5Q2, where Q is the number of catfish harvest per month. The corresponding short-run marginal cost curve is SMC(Q) = 2 + Q. All of the fixed costs are sunk.

1. What is the equation for the average variable cost (AVC)?
2. What is the minimum level of average variable costs?
3. What is Dave’s short-run supply curve?

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8.  Ron’s Window Washing Service is a small business that operates in the perfectly competitive residential window washing industry in Evanston, Illinois. The short-run total cost of production is STC(Q) = 40+ 10Q + 0.1Q2, where Q is the number of windows washed per day. The corresponding short-run marginal cost function is SMC(Q) = 10 + 0.2Q. The prevailing market price is \$20 per window.

a) How many windows should Ron wash to maximize profit?

b) What is Ron’s maximum daily profit?

c) Graph SMC, SAC, and the profit-maximizing quantity. On this graph, indicate the maximum daily profit.

d) What is Ron’s short-run supply curve, assuming that all of the \$40 per day fixed costs are sunk?

e) What is Ron’s short-run supply curve, assuming that if he produces zero output, he can rent or sell his fixed assets and therefore avoid all his fixed costs?

9.  The bolt-making industry currently consists of 20 producers, all of whom operate with the identical short-run total cost curve STC(Q) = 16 + Q2, where Q is the annual output of a firm. The corresponding short-run marginal cost curve is SMC(Q) = 2Q. The market demand curve for bolts is D(P) = 110 − P, where P is the market price.

a) Assuming that all of each firm’s \$16 fixed cost is sunk, what is a firm’s short-run supply curve?

b) What is the short-run market supply curve?

c) Determine the short-run equilibrium price and quantity in this industry.

10.  The oil drilling industry consists of 60 producers, all of whom have an identical short-run total cost curve, STC(Q) = 64 + 2Q2, where Q is the monthly output of a firm and \$64 is the monthly fixed cost. The corresponding short-run marginal cost curve is SMC(Q) = 4Q. Assume that \$32 of the firm’s monthly \$64 fixed cost can be avoided if the firm produces zero output in a month. The market demand curve for oil drilling services is D(P) = 400 − 5P, where D(P) is monthly demand at price P. Find the market supply curve in this market, and determine the short-run equilibrium price.

11.  A perfectly competitive industry consists of two types of firms: 100 firms of type A and 30 firms of type B. Each type A firm has a short-run supply curve sA(P) = 2P. Each type B firm has a short-run supply curve sB(P) = 10P. The market demand curve is D(P) = 5000 − 500P. What is the short-run equilibrium price in this market? At this price, how much does each type A firm produce, and how much does each type B firm produce?

12.  A firm in a competitive industry produces its output in two plants. Its total cost of producing Q1 units from the first plant is TC1 = (Q1)2, and the marginal cost at this plant is MC1 = 2Q1. The firm’s total cost of producing Q2 units from the second plant is TC2 = 2(Q2)2; the marginal cost at this plant is MC2 = 4Q2. The price in the market is P. What fraction of the firm’s total supply will be produced at plant 2?

13.  A competitive industry consists of 6 type A firms and 4 type B firms. Each firm of type A operates with the supply curve:

Each firm of type B operates with the supply curve:

a) Suppose the market demand is

At the market equilibrium, which firms are producing, and what is the equilibrium price?

b) Suppose the market demand is

At the market equilibrium, which firms are producing, and what is the equilibrium price?

14.  The raspberry growing industry in the U.S. is perfectly competitive, and each producer has a long-run marginal cost curve given by MCQ=20+2Q. The corresponding long-run average cost function is given by ACQ=20+Q+144QThe market demand curve is D(P) = 2488 2P. What is the long-run equilibrium price in this industry, and at this price, how much would an individual firm produce? How many active producers are in the raspberry growing industry in a long-run competitive?

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15.  Suppose that the world market for calcium is perfectly competitive and that, as a first approximation, all existing producers and potential entrants are identical. Consider the following information about the price of calcium:

Between 1990 and 1995, the market price was stable at about \$2 per pound.

In the first three months of 1996, the market price doubled, reaching a high of \$4 per pound, where it remained for the rest of 1996.

Throughout 1997 and 1998, the market price of calcium declined, eventually reaching \$2 per pound by the end of 1998.

Between 1998 and 2002, the market price was stable at about \$2 per pound.

Assuming that the technology for producing calcium did not change between 1990 and 2002 and that input prices faced by calcium producers have remained constant, what explains the pattern of prices that prevailed between 1990 and 2002? Is it likely that there are more producers of calcium in 2002 than there were in 1990? Fewer? The same number? Explain your answer.

16.  Each firm in the perfectly competitive widget industry produces with the levels of marginal cost (MC) and total variable cost (TVC) at various levels of output Q shown in the following table. Each firm has a total fixed cost of 64 and a sunk fixed cost of 48.

a) Draw a clearly labeled graph of the short-run supply schedule for this firm. Be sure to indicate the shutdown price for each firm and to explain your reasoning for the shape of the supply curve.

b) What is each firm’s producer surplus when the market price is 16?

c) What is the breakeven price for each firm?

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