1. Many Many smal smalll boat boats s are are made made of br breglas eglass, s, which which is derive derived d from from crud crude e oil. oil. Suppose that the price of oil rises. a. Using diagram diagrams, s, show what what happens happens to the cost cost curves curves of an individu individual al boat-making rm and to the market supply curve. b. hat hat happe happens ns to the the pro prott of boat makers makers in the sh shor ortt run! run! hat hat happens to the number of boat makers in the long run! ". #ou go out to the best best restauran restaurantt in town and order order a lobster lobster dinner for for $%&. 'fter eating half of the lobster, you realise that you are (uite full. #our date wants you to nish your dinner because because you can)t can)t take it home and because *you)ve already paid for it.+ hat should you do! . onsider onsider total cost cost and total total revenue revenue given given in the following following table table % Quantity Total cost Total revenue &%
1 &2 2
" 3 10
1% "$
$ 11 "
/ 1
%$0 13 $2
" /6
a. alculate alculate prot prot for each (uantity (uantity.. 4ow much should should the rm produce produce to ma5imi6e prot! b. alculate alculate marginal marginal revenue revenue and marginal marginal cost for each (uantity (uantity.. 7raph them. 84int 9ut the points between whole numbers. :or e5ample, the marg margin inal al cost cost betw betwee een n " and and sh shou ould ld be grap graphe hed d ";.< ";.< 't what what (uantity do these curves cross! 4ow does this relate to your answer to part 8auly ", 1331< *Since peaking in 130, per capita beef consumption in the United States has fallen by "2.0 percent?@andA the si6e of the U.S. cattle herd has shrunk to a %-year low.+ a. Usin Using g rm and ind indus ustr try y diagr iagra ams, ms, show how the short hort-r -ru un eBec eBectt of declining demand for beef. Cabel the diagram carefully and write out in words all of the changes you can identify. b. Dn a new new diagra diagram, m, show show the longlong-ru run n eBect eBect of decl declin inin ing g demand demand for beef. beef. E5plain in words. /. 'ssume that the gold-mining industry is competitive. a. =llustrate =llustrate a long-run long-run e(uilibr e(uilibrium ium using using diagrams diagrams for the gold gold market market and for a representative gold mine. b. Suppos Suppose e that an increas increase e in Feweller Fewellery y demand induce induces s a surge surge in the dema demand nd for for gold gold.. Usin Using g your your diag diagra rams ms from from part part 8a<, 8a<, sh show ow what what happens in the short run to the gold market and to each e5isting gold mine. c. =f the demand demand for gold gold remain remains s high, high, what would would happe happen n to the price price over time! Specically, would the new long-run e(uilibrium price be above, below, or e(ual to the short-run e(uilibrium price in part 8b
1. Ghe answers answers are are as follows follows
a. Ghe rise in the price of crude oil increases production costs for individual rms and thus shifts the industry supply curve up, as shown in :igure 1. Ghe typical rm)s initial marginal-cost curve is M 1 and its average-total-cost curve is 'G 1. =n the initial e(uilibrium, the industry supply curve, S 1, intersects the demand curve at price 9 1, which is e(ual to the minimum average total cost of the typical rm. Ghus, the typical rm earns no economic prot. Ghe increase in the price of oil shifts the typical rm)s cost curves up to M " and 'G", and shifts the industry supply curve up to S ". Ghe e(uilibrium price rises from 9 1 to 9 ", but the price does not increase by as much as the increase in marginal cost for the rm. 's a result, price is less than average total cost for the rm, so prots are negative. b. =n the long run, the negative prots lead some rms to e5it the industry. 's they do so, the industry-supply curve shifts to the left. Ghis continues until the price rises to e(ual the minimum point on the rm)s average-total-cost curve. Ghe long-run e(uilibrium occurs with supply curve S, e(uilibrium price 9, industry output H , and rm)s output ( . Ghus, in the long run, prots are 6ero again and there are fewer rms in the industry.
Figure 1.
". Dnce you have ordered the dinner, its cost is sunk, so it does not represent an opportunity cost. 's a result, the cost of the dinner should not inIuence your decision about whether to nish it or not. . 4ere is the table showing costs, revenues, and prots
Huanti ty
Gotal cost
Margin al cost
Gotal reven ue
% 1 " $
2 3 1% 11 1
--1 1 1 "
% 2 10 "$ "
Margin al revenu e --2 2 2 2
9rot -2 -1 0 1 13
/ 0
13 "
0 2 1%
$% $2 /0
2 2 2
"1 "1 13
a. Ghe rm should produce ve or si5 units to ma5imi6e prot. b. Marginal revenue and marginal cost are graphed in :igure ". Ghe curves cross at a (uantity between ve and si5 units, yielding the same answer as in 9art 8a<.
Figure 2.
c. Ghis industry is competitive because marginal revenue is the same for each (uantity. Ghe industry is not in long-run e(uilibrium, because prot is not e(ual to 6ero. $. Ghe answers are as follows a. :igure shows the short-run eBect of declining demand for beef. Ghe shift of the industry demand curve from J 1 to J" reduces the (uantity from H1 to H " and reduces the price from 9 1 to 9 ". Ghis aBects the rm, reducing its (uantity from (1 to (". Kefore the decline in the price, the rm was making 6ero protsL afterwards, prots are negative, as average total cost e5ceeds price.
Figure 3.
b. :igure $ shows the long-run eBect of declining demand for beef. Kecause rms were losing money in the short run, some rms leave the industry. Ghis shifts the supply curve from S 1 to S. Ghe shift of the supply curve is Fust enough to increase the price back to its original level, 9 1. 's a result, industry output falls to H . :or rms that remain in the industry, the rise in the price to 9 1 returns them to their original situation, producing an output level of ( 1 and earning 6ero prots.
Figure 4.
/. Ghe answers are as follows a. :igure / illustrates the gold-mining industry and a representative gold mine 8rm<. Ghe demand curve, J 1, intersects the supply curve at industry (uantity H1 and price 9 1. Kecause the industry is in long-run e(uilibrium, the price e(uals the minimum point on the representative rm)s average total cost curve, so the rm produces output ( 1 and makes 6ero prot. a. Ghe increase in Fewellery demand leads to an increase in the demand for gold, shifting the demand curve to J ". =n the short run, the price rises to 9", industry output rises to H ", and the representative rm)s output rises to (". Kecause price now e5ceeds average total cost, the representative rm now earns positive prots. a. Kecause gold mines are earning positive economic prots, over time other rms will enter the industry. Ghis will shift the supply curve to the right, reducing the price below. Kut it is unlikely that the price will fall all the way back to 9 1, because gold is in short supply. osts for new rms are likely to be higher than for older rms, because they will have to discover new gold
sources. So it is likely that the long-run supply curve in the gold industry is upward sloping. Ghat means that the long-run e(uilibrium price will be higher than it was initially.
Figure 5.
