Homework 8 (80 Points)

Transcription

1 Homework 8 (80 Points) due: 12/30 Part I (40 Points) 1. Consider total cost and total revenue given in the following table: Is the firm in a competitive industry? (2 Points) Can you tell whether the industry is in a long-run equilibrium? (2 Points) 2. A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed costs of $200. What is its profit? (2 Points) What is its marginal cost? (2 Points) Is the efficient scale of the firm more than, less than, or exactly 100 units? (2 Points) 3. The market for fertilizer is perfectly competitive. Firms in the market are producing output, but are currently making economic losses. How does the price of fertilizer compare to (a) the average total cost, (b) the average variable cost, and (c) the marginal cost of producing fertilizer? (5 Points) Assuming there is no change in either demand or the firms cost curves, explain what will happen in the long run to (a) the price of fertilizer, (b) marginal cost, (c) average total cost, (d) the quantity supplied by each firm, and (e) the total quantity supplied to the market. (5 Points) 1

2 4. The market for apple pies in the city of Ectenia is competitive and has the following demand schedule: Each producer in the market has fixed costs of $9 and the following marginal cost: The price of a pie is now $11. How many pies are sold? (2 Points) How many producers are there? (2 Points) How much profit does each producer earn? (2 Points) Suppose that in the long run there is free entry and exit. (a) What is the market price and number of pies each producer makes? (b) How many pie producers are operating? (4 Points) 2

3 5. Suppose there are 1,000 hot pretzel stands operating in New York City. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels slopes downward, and the market for pretzels is in long-run competitive equilibrium. The city decides to restrict the number of pretzel-stand licenses, reducing the number of stands to only 800. What effect will this action have on the market and on an individual stand that is still operating? Draw graphs to illustrate your answer. (4 Points) Suppose that the city decides to charge a fee for the 800 licenses, all of which are quickly sold. How will the size of the fee affect the number of pretzels sold by an individual stand? How will it affect the price of pretzels in the city? (4 Points) The city wants to raise as much revenue as possible, while ensuring that all 800 licenses are sold. How high should the city set the license fee? Show the answer on your graph. (2 Points) 3

4 Part II (20 Points) The degree of competitiveness of an industry can be measured in a number of different ways. One method is to use a statistic called the concentration ratio. A 4-firm concentration ratio, for example, measures the percentage of total output in the market supplied by the 4 largest firms. Similarly, a 50-firm concentration ratio measures the percentage of total output in the market supplied by the 50 largest firms. In this exercise, we look at the concentration level of major U.S. industries. 1. Using data from the 2007 U.S. Economic Census, fill in the following table: (15 Points) Number of Average Revenue 50-firm Sector Establishments (in $millions) Concentration Ratio Utilities Wholesale Trade Retail Trade Transportation and Warehousing Information Finance and Insurance Real Estate and Rental and Leasing Professional, Scientific, and Technical Services Administrative and Support and Waste Management and Remediation Services Educational Services Health Care and Social Assistance Arts, Entertainment and Recreation Accommodation and Foodservices 2. According to the 50-firm concentration ratio, which was the most concentrated industry and which was the least concentrated industry in the U.S. in 2007? (5 Points) 4

5 Part III (20 Points) Read Chapters X of New Ideas from Dead Economists and, in 1 2 pages, summarize the main ideas and contributions of Milton Friedman and Monetarists. (20 Points) Bonus Problem 1 Read Chapters XI of New Ideas from Dead Economists and, in 1 the main ideas and contributions of the Public Choice School. 2 pages, summarize 1 Each bonus problem will be worth 100/n points, where n is the total number of bonus problems we will have assigned by the end of the semester. 5