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Homework 6 Answers. Question 1: Which is not a characteristic of a perfectly competitive industry? _B__ a. Marginal revenue is equal to the market price b. Products from different firms in the industry are complements c. Firms can easily enter and/or exit the industry (in the long run)

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homework 6 answers
Homework 6 Answers
  • Question 1: Which is not a characteristic of a perfectly competitive industry? _B__
  • a. Marginal revenue is equal to the market price
  • b. Products from different firms in the industry are complements
  • c. Firms can easily enter and/or exit the industry (in the long run)
  • d. Firms and consumers have perfect information
  • Question 2: If average variable cost exceeds the market price, a firm should: __C_
  • a. Increase production
  • b. Decrease production but keep producing at positive levels
  • c. Shut down
  • d. Continue producing at current level
  • Question 3: In the long run, economic profits in a competitive industry are equal to: _C_
  • a. Accounting profits
  • b. Total revenue
  • c. Zero
  • d. The absolute value of fixed costs
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Question 4: Efficiency of competitive equilibrium

  • Why is a competitive equilibrium efficient in the short run?

MR=MC. Cost of last unit produced is exactly equal to what buyers are willing to pay for it

b. What are the benefits to society as a whole of competitive equilibrium in the long run?

Output is produced in the least cost way (P=min LAC). Producers earn only normal profit so that all benefits are captured by consumers

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Question 5. On the following graph of a firm’s costs in the short run, label the curves and indicate the supply function using a heavier line or different color ink

slide4

Question 7 Suppose that bicycles are produced by a perfectly competitive, constant cost industry. Which of the following will have a larger effect on the long-run price of bicycles: 1) a government program to advertise the health benefits of bicycling or 2) a government program that increases the demand for steel, an input into the manufacture of bicycles that is produced in an increasing cost industry? Briefly explain why.

  • Advertisement about health benefits: Since the supply curve faced by the individual firm is elastic, the advertisement (which shifts the demand curve out) will increase quantity but leave price unchanged.
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Program that raises price of steel: The result will be a shift in the long-run supply curve. Price of bicycles will increase and quantity will decrease.

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Question 9 The government of Philadelphia is currently debating whether they should implement a tax on soda. The hourly supply function for soda is P = 1+ .5QS and the hourly demand function is P = 20-1.5QD. Suppose the government is considering a tax of $4 on each unit that the supplier sells.

Graph the supply and demand functions for soda in the space below (on the same graph

slide9

P

Stax = 5+.5Q

S=1+.5Q

Pc =8.75

Tax born by consumers

P*=5.75

Tax born by producers

Ps = 4.75

Qt =7.5

Q*=9.5

5

15

Q

slide10

Calculate and label on the graph:

  • No-tax equilibrium price and quantity of soda (P*, Q*)
  • Supply = demand => 1+.5Q=20-1.5Q =>Q*=9.5 and P*=5.75
  • Price consumers pay with the tax (Pc)
  • At Qtax=7.5, Pc = 20-1.5(7.5) = 8.75
  • Price sellers receive with the tax (Ps)
  • Qtax=7.5, Ps=1+.5(7.5) = 4.75
  • Quantity sold with the tax (Qt)
  • With the tax on supply, the new supply curve will be P=5+.5Q. New equilibrium will be 5+.5Q =20-1.5Q => Qtax=7.5
  • Indicate the size of the tax and the tax burden born by producers and consumers on the graph
  • Tax = 7.5*4= 30. Consumers pay 7.5*3 = 22.5 and producers pay 7.5*1 = 7.5