Friday, March 09, 2007

Some things to think about in re: to perfect competition...

It's 4/5th hour, so I'm not positive how far we'll get, so this may be further along than we are in class. :)

1. The licorice industry is competitive. Each firm produces 2 million strings of licorice in a year. The strings have an average total cost of $.20 each, and they sell for $.30.
(a) What is the marginal cost of a string?
(b) Is this industry in long run equilibrium? Why or why not?

2. Bob's lawn mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob's short run decision regarding shut down and his long run decision regarding exit from the market?

3. Your best friend's long hours in the chemistry lab have finally paid off - she discovered a secret formula that allows people to do an hour's worth of studying in 5 minutes. So far, she's sold 200 doses, and faces the following ATC schedule: (Q--ATC) 199 -- $199, 200 -- $200, 201 -- $201. If a new customer offers to pay your friend $300 for one dose should she make one more? Explain.

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I'm off to read rough drafts! I should be able to hand a couple back today that were emailed to me earlier this week - otherwise, my goal is to have them back to you on Monday. We'll see how that goes...then, you have a week to rewrite - they're due on M 3/19. :) (Wow, the 3rd quarter ends that Friday after that, already!)

10 comments:

kfbare said...

Okay, here's a shot at #2
So, Bob makes $270 a day from mowing lawns. With that he can pay all of his VC which= $250 (280-30), and will have $20 left over to pay for SOME of his fixed cost which =$30. Bob is operating at a loss, but since he can pay for all of his VC and some of his FC he should not shut down. By shutting down he would be at a greater loss because he would have to pay for ALL of his fixed costs instead of just some.

D Mac said...

for #1. the marginal cost of a string of licorice is $.20 because it costs .20 to make one string. aaannd...i dunno how to determine if its in long run equilibrium.

Raveen Shah said...

#1. The marginal cost of a string is twenty cents since it is the increase in the total cost when another string is created. B) ...not too sure how to answer this part...

Dan said...

#2
Well Bob is losing money right now, about $10 a day, so short run he should stay in operation as he is covering fixed costs and most of his variable costs. Long term he is going to have to exit the market as he will not make a profit ever.

Dan said...

#3
Yes, her total costs seem to be about 1$ per dose. If she is being offered 300$ to make one dose, she makes over 299$ in profit. This covers all of the other made dose's costs and still leaves her in the positive.

joelleb said...

#3 If the customer if offering to pay $300 for one more dose, this overall would increase the ATC. Increasing ATC would then increase MC and exceed the point of equilibrium, making the addition of another unit profitable. I'm kind of confused about this question, because if the student were to accept the offer, would this shift the ATC curve upward or just move the point along the MC curve? I don't really remember talking about movement of the curves in class..

Wojtek said...

#2 Bob is loosing money. That's sad but not tragic; he is still between the curves - above the shout-down point. This might be even a good position to be because in some countries (I don’t know about US but in Poland for sure) you don’t have to pay taxes for a company that doesn't generate profit. it gets even better, you get some kind of a deduction on some other taxes.
Anyhow, this situation is not permanent. Something will change soon- he'll either start making money (mowing more lawns) or he'll give up and exit the market.

KM said...

#2 - absolutely right for those of you that answered that one. :)

#1 - ATC is not the same thing as TC - so $.20 is not correct. And NOW...you should be able to tell if it's in equilibrium... :) :)

#3 - you're in the right field.

Nice answers, hey? :P

keri said...

For number two:
Bob is losing money right now, since he is only making $270, and not the $280 that is his TC. Bob should definitly stay in the market in the short run, because he is just short of equillibrium, and he is above the VC, so he's in alright shape at the moment. If things continue at this rate, though, and he can't pay for his costs, he will have to exit the market. But right now exiting would only hurt him more, so he should stay in themarket. In the long run, he could pick up more business or charge more money making him at equillibrium or in the profit area.

nick_oehlrich said...

For #2, because Bob is at a loss but can still pay for his VC, he should not shut down right away. But in the long run, if things continue at this rate, he will have to shut down