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Final Exam Review Microeconomics

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Final Exam ReviewMicroeconomics

Econ EB122

WIN 2012

Inst. Shan A . Garib

Mohawk College

Final Exam Microeconomics

Date: Monday April 5th, 2013

Time: 12:30pm – 2:00pm

In-Class

Review ALL Quizzes given in class

- Example: Say we have a price = MR = D of $311, $662, $1163
- Output (Q) AVC ATCTC(=ATC*Q) MC MR 1 MR 2 MR 3
- 1 40 100 100*1=100 31 66 116
- 2 35 80 80*2=160 30 31 66 116
- 3 40 72 72*3=216 65 31 66 116
- 4 75 80 85*4=340 115 31 66 116
- PC Max profit at P,MR=MC
- Therefore,
- Remember TC= TFC+TVC
- @MR$31>=MC$30 and Q=2, Rev=2*31=$62, ∏=$62-$160= -$98, MR < AVC < ATC (shut down LR)
- @MR$66>=MC$65 and Q=3, Rev=3*66=$198, ∏=$198-$216=-$18, AVC < MR < ATC (shut down SR)
- @MR$116≈MC$115 and Q=4, Rev=4*116=$464, ∏=$464-$340, AVC < ATC < MR (stay in business)
- Rules: MR >= MC

- Calculating the SR Breakeven Price
- At what point do you shut down? the BE Price where MR = Lowest ATC pt. B and TR = TC
- pt. B there are no econ profits Min ATC = 80
- pt C is SR shut down price Min AVC = 35
- So if P,D,MR 1 = 66 then it is between Min ATC (B) and Min AVC (C) Firms shut down in SR

MC

Perfectly Competitive

P

ATC

B

AVC

MR, Pc, D1 = 80

MR, Pc, D1 = 35

C

- At what point do you shut down? the BE Price where MR = Lowest ATC pt. B and TR = TC
- pt. B there are no econ profits Min ATC = 72
- pt C is SR shut down price Min AVC = 67
- So if P,D,MR2 = 31 then it is below Min ATC (B) and Min AVC (C) Firms shut down in LR

MC

Perfectly Competitive

P

ATC

B

AVC

MR, Pc, D1 , = 72

MR, Pc, D1, = 67

C

- Calculating the SR Breakeven Price
- At what point do you shut down? the BE Price where MR = Lowest ATC pt. B and TR = TC
- pt. B there are no econ profits Min ATC = 85
- pt C is SR shut down price Min AVC = 75
- So if P,D,MR 3 = 116 then it is greater than Min ATC (B) and Min AVC (C) Firms stay in business

MC

Perfectly Competitive

P

ATC

B

AVC

MR = Pc = D1 = 85

MR = Pc = D1 = 75

C

- Example: Say we have a price/unit of $611, $662, $1163
- We have an industry of 100 firms:
- Output (Q) AVC ATCTC(=ATC*Q) MC MR 1 MR 2 MR 3
- 1 40 100 100*1=100 31 66 116
- 2 35 80 80*2=160 30 31 66 116
- 3 40 72 72*3=216 65 31 66 116
- 4 75 80 85*4=340 115 31 66 116 Therefore,
- @firm1 price $31, Q = 2, industry Q =200
- @firm2 price $66, Q = 3, industry Q =300
- @firm3 price $116, Q = 4, industry Q =400
- For an Industry equilibrium of (P, Q*100) = ($116,400)
- ∏ = Rev – Total Cost
- = 400*$116 – (34000)
- = 46400 – 34000
- = 12400

MC

ATC1

ATC3

ATC2

A

PM

B

CM

Profit

D

MR

QM

Price

LOSS

C

0

Quantity

MC

ATC2

ATC1

PM

D

MR

QM

Price

CM =

0

Quantity

MC

ATC

Loss

B

CM

A

PM

D

MR

QM

Price

0

Quantity

D

MR

Monopolist Price and Quantity Effects

Single Monoply Firm

Industry (10 firms)

P

P

S = MC

Di

Si = SUM of MC

10 firms in industry

Pm

PPC=MRPC

DPC =

MCM

AMon

1.1

21

2.1

Q

Q

- Compared to the PC firm, the monopolist produces less (1.1) and charges more (PM) See point “A” where, for the Monopolist MR=MC
- At point “B” the PC firm maxes profit where MR=MC for the PC firm. So QPC= 2.1 and price = PPC

- At point “B” the PC firm maxes profit where MR=MC
- Remember, for a PC firm MR=P so, the firm maxes profit at P=MC
- If MR > MC then the PC firm will increase production until MR(=P)=MC

- The PC ALWAYS produces at the SOCIALLY OPTIMAL point! ALLOCATIVE EFFICIENT
- But, the monopolist produces at P > MC

- But, the monopolist produces at P > MC see point “A”
- Compared to the PC firm, QMON < QPC
- THE MONOPOLIST FIRM DOES NOT PRODUCE (Q) AT THE SOCIALLY OPTIMAL POINT!!
- This is an example of:
Allocative INEFFICIENCY

- This is an example of:

- The PC firm has to, in the long run, produce at MIN ATC to stay in business.
- This is the point at which the competiton has driven the price down (undercut each other) until
price sold = price to produce ie

If, Profit = TRev > TCost

Then, in a PC market

ZERO Profit = TR = TC what is produced is what society WANTS! Productive Efficiency

The Monopolist doesn’t have to worry about productive efficiency because there is no competition! It can set price ABOVE MC where

Profit = TRev > TCost ALWAYS

- This is the point at which the competiton has driven the price down (undercut each other) until

- A Natural Monopoly is a firm that first takes advantage of economies of scale (big size) which allow it to operate at low costs
- It’s MC is pretty much constant ie. horizontal to x-axis ie. perfectly elastic
- Let’s see how this looks...

Pm

D

D = P

MR

MR

Monopolist Price and Quantity Effects

Regulation of a Single Monoply Firm

Single Monoply Firm

P

P

MC

MC

A

C

Pm

PAC

ATC

B

PREG

MCM

MCM

A

QM

QREG

QM

Q

Q

QAC

- It’s MC is pretty much constant ie. horizontal to x-axis ie. perfectly elastic but still produces at point “A” where:
MC=MR and production = QM

Not productively or allocatively efficient

- Through regulation, the government can force the monopolist to produce at the socially optimal point, “B” where:
P = MC and production = QREG

- Through regulation, the government will force the monopolist to produce at the socially optimal point, “B” where:
P = MC and production = QREG

Productively and allocatively efficient

- BUT, the government can’t force the monopolist to produce at point “B” because at this point in the long run the firm would have to shut down.
- They allow a FAIR RETURN to exist at point “C” through Average Cost Pricing
- Not productively or allocatively efficient

D

D,P

MR

MR

Short Run and Long Run in Monopolistic Competition

Single Monoply Firm

Single Monopolistically Competitive Firm Long Run

Profit

P

P

MC

MC

B

Pm

P = ATC

ATCM

A

ATC

ATC

QM

QM

Q

Q

- Like a monopoly,

- The monopolistic competitive firm has some monopoly power so the firm faces a downward sloping demand curve

- Marginal revenue is below price

- At profit maximizing output, marginal cost will be less than price see point “A”

- Like a perfect competitor, zero economic profits exist in the long run see point “B”DEMAND MOVES DOWN to P=ATC and profit=ZERO. As profits are made more firms move in the market and demand for the original firm’s product goes down.

P

MC

- In monopolistic competition in the long run, P > min ATC,
- In perfect competition in the long run, P = min ATC

ATC

PMC

DPC

Outcome:

Monopolistic competition output is lower and

price is higher than

perfect competition

PPC

DMC

MRMC

Q

QMC

QPC

P

MC

- In monopolistic competition in the long run, P > min ATC,

ATC

PMC

DPC

Outcome:

Monopolistic competition output is lower (excess capacity) and

price is higher than

perfect competition

PPC

DMC

MRMC

Q

QMC

QPC

P

MC

- So, if (MIN) ATC= 3 =P and lets say Q= 4 then TC= 3*4=12 and
- If, for example, price = 3 at Q=4 then, TR is 4*3=12 and profit=12-12=0

ATC

PMC

DPC

PPC

Outcome:

Monopolistic competition output is lower (excess capacity) and

price is higher than

perfect competition

DMC

MRMC

Q

QMC

QPC

- At pt. A: MC(A) < MR(B) so can produce more to get more profit
- Continue to produce until pt. C where P,MR=MC
- Profit is box: GCEF

Profit

P

MC

ATC

B

C

MR, P, D

G

E

F

A

Q