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EXERCISE REVISION Student Version
EXERCISE REVISION Student Version
EXERCISE REVISION Student Version
revision
FORMAT
FORMAT
Example 2: How price floors affect market outcome (binding and not binding cases)? The
policy on price floor is to protect whom? Why economists often oppose price floor?
Example 3:
When the Sharons had a monthly income of $4,000, they usually ate out 8 times a month.
Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the
couple's income elasticity of demand using the midpoint method. Explain your answer. Is
a restaurant meal a normal or inferior good to the couple?
MR = D = AR = P
PERFECT COMPETITION
PERFECT COMPETITION
Figure The Competitive Firm’s Short Run Supply Curve
Costs
Firm’s short-run
If P > ATC, the firm supply curve MC
will continue to
produce at a profit.
ATC
.
If P > AVC, firm will
continue to produce in AVC
the short run.
Firm
shuts
. The firm’s SR supply
down if
P< AVC curve is the portion of
0 Quantity
• Profit-maximization: MC = MR
• Perfect competition: P = MR
• So, in the competitive eq’m: P = MC
• Firm earn positive economic profit: P>ATC
• Firm get loss: ATC>P>AVC
• Firm decide to shut down in SR: P<AVC
• In LR, firm earn zero-economic profit
• The firm’s supply curve is the portion of its MC
curve above ATC.
ACTIVE LEARNING 1
Identifying a firm’s decision
A firm in competitive market has demand and total cost functions as follows:
P = 2600 – 10Q
TC = 2.5Q2 + 100Q + 5000
Questions:
a. What are fixed cost (FC), variable cost (VC), average total cost (ATC) and marginal
cost (MC)?
b. What are price and quantity for the firm to maximize profits? Calculate ∏
c. Suppose the government imposes a tax of $10/unit, what are the price and
quantity when firm maximize profits?
Example 3
Identifying a firm’s decision
D
MR
Q Quantity
Profit-maximizing output
=> The profit-maximizing Q is where MR = MC
The Monopolist’s Profit
Costs and
Revenue MC
As with a P
ATC
competitive firm, ATC
the monopolist’s
profit equals D
(P – ATC) x Q
MR
Q Quantity
CHAPTER 15 MONOPOLY
A Monopoly’s Profit
Producer
Surplus D
MC MR
QM Quantity
A C T I V E L E A R N I N G 3:
Monopoly decisions and Government policies
A monopolist is facing with a demand curve: P = 24 – 2Q
and total cost function: TC=2Q2+15
a. Calculate P1, Q1 and ∏1 when firm maximize profit
b. Calculate P2, Q2 and ∏2 when firm maximize total
revenue
c. Government imposes 3$/ unit tax on producer. What is
new P3 and Q3 to maximize profit
d. Calculate the CS, PS
e. Calculate the DWL caused by this monopolist
FORMULA REVIEW
TR = PxQ
MR = DTR/DQ = (TR)’Q
MC = DTC/DQ = (TC)’Q
∏ = TR - TC
a. Firm maximizes profit MR = MC
b. Firm maximizes total revenue MR = 0
c. Government imposes 3$/ unit tax on producer => MR = MCtax
d. CS = SABC ; PS = SCBFG
e. DWL = SBEF
A C T I V E L E A R N I N G 3:
Monopoly decisions and Government policies
Price
A Deadweight
???
loss MC
B
??? C
??? E
???
F
D
MR
? Quantity
G ??? ???
A C T I V E L E A R N I N G 3:
Monopoly decisions and Government policies
Price
A Deadweight
24
loss MC
C B
18
16 E
12
F
D
MR
? Quantity
G 3 4
A C T I V E L E A R N I N G 4:
Monopoly decisions and Government policies
A monopolist is facing with a demand curve: P = 220 – 2Q
and total cost function: TC = Q2 + 40Q+ 1400
a. Calculate P1, Q1 and ∏1 when firm maximize profit
b. Calculate P2, Q2 and ∏2 when firm maximize total
revenue
c. Government imposes 10$/ unit tax on producer. What is
new P3 and Q3 to maximize profit
d. Calculate the PS, CS, and DWL caused by this
monopolist.
A C T I V E L E A R N I N G 5:
Monopoly decisions and Government policies
A monopolist is facing with a demand curve: P = 18 – 2Q
and total cost function: TC = Q2
a. Calculate P1, Q1 and ∏1 when firm maximize profit
b. Calculate P2, Q2 and ∏2 when firm maximize total
revenue
c. Government imposes 3$/ unit tax on producer. What is
new P3 and Q3 to maximize profit
d. Calculate the DWL caused by this monopolist.
3. TAX
A C T I V E L E A R N I N G 1:
Tax and Government policies
You are given the following information about the market for bags:
P = (Q+1)/2
P = 11-Q
(P: $; Q: bags)
a. Find the equilibrium price and quantity of bags in this market.
b. Calculate market equilibrium price and quantity.
c. Suppose that the government decides to impose an excise tax of
$0.5/unit on producers in this market. Find tax burden on buyers
and sellers.
d. Demonstrate your answers with graphs.
4. PRICE FLOOR &
PRICE CEILING
A C T I V E L E A R N I N G 1:
Price floor & Price ceiling
a. What is the market equilibrium rental price per month and the market equilibrium
number of apartments demanded and supplied?
b. If the local government sets the maximum monthly rent at $1,500, will there be a
surplus or a shortage? Of how many units?
c. If the local government declares that the minimum rent that can be charged is $2,500
per month, will there be a surplus or a shortage? Of how many units?