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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 .00001Q 2

MC = dTC/dQ = $1 .25 + $0 .00002Q

 

and Q is number of widgets. Total costs include a normal profit.

 

A.

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.

B.

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.

 

 

 

 

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.

 

A.

Producer surplus tends to fall as the supply curve becomes more elastic.

B.

Consumer surplus tends to rise as demand becomes more elastic.

C.

The market demand curve indicates the minimum price buyers are willing to pay at each level of production.

D.

The market supply curve indicates the minimum price required by sellers as a group to bring forth production.

E.

Consumer surplus is the amount that consumers are willing to pay for a given good or service above and beyond the amount actually paid.

 

 

 

 

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 theUnited States andCanada, but wheat crops from the Southern Hemisphere are much harder to predict.Argentina's wheat acreage varies dramatically from one year to another, for example, andAustralia 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:

 

P = $2 + 0 .001Q S

(Market Supply)

P = $4 .80 - $0 .0004Q D

(Market Demand)

 

where Q is output in bushels of wheat (in millions), and P is the market price per bushel.

 

A.

Calculate the equilibrium price/output solution. Explain your answers and show all work.

B.

Determine the loss in consumer surplus due imposition of a $4 .40 per bushel price support program. Explain your answers well.

 

 

 

 

 

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.

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