Transcript ECON 1001 AB Introduction to Economics I Dr. Ka

ECON 1001 AB
Introduction to Economics I
Dr. Ka-fu WONG
Sixth week of tutorial sessions
KKL 925, K812, KKL 106
Clifford CHAN
KKL 1109
[email protected]
Covered and to be covered
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Covered the week before the break
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Dr. Wong finished up to kf006.ppt
You should have at least read up to Chapter 6 Perfectly
competitive supply: The cost side of the market
If not, please press hard on it. Start reading Chapter 7
To be covered in the tutorial sessions this week
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Problems in chapter 6: #1, #3, #5, #7 and #9
You are advised to work on the even ones as well
Problem #1, Chapter 6 (1)
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Zoe is trying to decide how to divide her time between
her job as a wedding photographer, which pays $27 per
hours for as many hours as she chooses to work, and as
a fossil collector, in which her pay depends both on the
price of fossils and the number of them she finds.
Earnings aside, Zoe is indifferent between the two tasks,
and the number of fossils she can find depends on the
number of hours a day she researches, as shown in the
table below.
Problem #1, Chapter 6 (2)
Hours per day
Total fossils per day
1
5
2
9
3
12
4
14
5
15
Solution to Problem #1 (1)
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Derive a table with a price in dollar increments from $0 to
$30 in the first column and the quantity of fossils Zoe is
willing to supply per day at that price in the second
column
Solution to Problem #1 (2)
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In the first hour, Zoe can collect 5 fossils
If the price of a fossil is $5, Zoe can make a total $25 in
an hour if she devotes all her time to collecting fossils,
which is less than the money she can earn from
photography
Thus, she won’t collect fossil if the price of a fossil is less
than $5
If the price of a fossil is $6 Zoe should devote all her time
to photography, as she can make $30 an hour from
photography
Solution to Problem #1 (3)
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An additional hour would yield only 4 additional fossils or
$24 additional revenue, so she should not spend any
further time looking for fossils
If the price of fossils rises to $7, however, the additional
hour gathering fossils would yield an additional $28, so
gathering fossils during that hour would then be the best
choice, and Zoe would therefore supply 9 fossils per day
Solution to Problem #1 (4)
Price of fossils ($)
# of fossils supplied / day
0–5
0
6
5
7, 8
9
9 – 13
12
14 – 26
14
27+
15
Solution to Problem #1 (5)
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Plot these points in a graph with price on the vertical axis
and quantity per day on the horizontal. What is this curve
called?
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The curve will depict a price-quantity supplied
relationship for fossils as follows
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In other words, it is SUPPLY CURVE for fossils
Solution to Problem #1 (6)
Zoe's Supply Curve for Fossils
Price ($/fossil)
35
30
25
20
15
10
5
0
0
5
10
Nu mb er o f fo ssils
15
20
Problem #3, Chapter 6 (1)
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The Paducah Slugger Company makes baseball bats
out of lumber supplied to it by Acme Sporting Goods,
which pays Paducah $10 for each finished bat.
Paducah’s only factors of production are lathe operators
and a small building with a lathe. The number of bats per
day it produces depends on the number of employeehours per day, as shown in the table below.
Problem #3, Chapter 6 (2)
# of bats per day
# of employee-hours per day
0
0
5
1
10
2
15
4
20
7
25
11
30
16
35
22
Problem #3, Chapter 6 (3)
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If the wage is $15 per hour and Paducah’s daily fixed
cost for the lathe and building is $60, what is the profitmaximizing quantity of bats?
What would be the profit-maximizing number of bats if
the firm’s fixed cost were not $60 per day but only $30?
Solution to Problem #3 (1)
Quantity
(bats/day)
Total
Revenue
($/day)
Total labour cost
(hours X wage)
Total cost
(labour cost +
fixed cost)
Profit ($/day)
(revenue –
cost)
0
0
0 *15 = $0
0 + 60 =$60
-$60
5
50
1 *15 = $15
15 + 60 =$75
-$25
10
100
2 *15 = $30
30 + 60 =$90
$10
15
150
4 *15 = $60
60 + 60 =$120
$30
20
200
7 * 15 = $105
105 + 60 =$165
$35
25
250
11 *15 = $165
165 + 60 =$225
$25
30
300
16 *15 = $240
240 + 60 =$300
$0
35
350
22 *15 = $330
330 + 60 =$390
-$40
Solution to Problem #3 (2)
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Based on the above table, we note that the profitmaximizing quantity of bats is 20, as it yield the highest
profit of $35
If the firm’s fixed cost decreases from $60 to $30, what is
the profit maximizing quantity of bats?
It is still 20 bats
Why?
Decrease in fixed cost will increase the profits across
different quantities of bats by the same amount ($30)
20 bats will yield a new highest profit of $35 +$30 = $65
Problem #5, Chapter 6
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The supply curve for the only two firms in a competitive
industry are given by P=2Q1 and P= 2+Q2, where Q1 is
the output of firm 1 and Q2 is the output of firm 2. What is
the market supply curve for this industry? (Hint: graph
the two curves side by side, then add their respective
quantities at a sample of different prices.)
Solution to Problem #5 (1)
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Horizontal summation means holding price fixed and
adding the corresponding quantities
Firm 1
P
P =2Q1
6
Market supply curve
Firm 2
P
P =2+Q2
6
P
S
6
P= (4/3) + (2/3)Q for P>2
4
4
4
2
2
2
Q1
1
2
3
Q2
2
4
P= 2Q for P<2
1
4
Q
7
Problem #7, Chapter 6
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For the pizza seller whose marginal, average variable,
and average total cost curves are shown in the
accompanying diagram, what is the profit-maximizing
level of output and how much profit will this producer
earn if the price of pizza is $2.50 per slice?
Solution to Problem #7 (1)
Price ($/slice)
MC
2.50
ATC
AVC
1.40
0
570
Quantity (slices/day)
Solution to Problem #7 (2)
Price ($/slice)
MC
ATC
2.50
AVC
1.40
0
570
Quantity (slices/day)
Wrong! MC cuts ATC at its minimum.
Solution to Problem #7 (3)
Price ($/slice)
MC
ATC
2.50
AVC
1.40
0
570
Quantity (slices/day)
Wrong! MC cuts AVC at its minimum.
Solution to Problem #7 (4)
Price ($/slice)
MC
ATC
2.50
AVC
1.40
0
570
Quantity (slices/day)
Wrong! AVC and ATC approaches each other as quantity increases.
Solution to Problem #7 (5)
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Unless specific, assume it is a perfectly competitive
market
Firms are earning a zero economic profit
Firms should always charge at a price that is equal to
their marginal cost
Solution to Problem #7 (6)
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If P > ATC > AVC, the firm operates with a profit
If ATC > P > AVC, the firm still operates but with a lossthe operation can cover part of its cost
If ATC > AVC > P, the firm should shut down as it cannot
even cover part of its cost
Solution to Problem #7 (7)
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To maximize profit, the firm will produce 570 slices of
pizza a day
Why?
A perfectly competitive firm should always charge at a
price that is equal to their marginal cost
The associated profit is (P or MC – ATC)*Q
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($2.5 / slice - $1.4 / slice) * 570 slices / day
$627 / day
Problem #9, Chapter 6
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For the pizza seller whole marginal, average variable,
and average total cost curves are shown in the
accompanying diagram, what is the profit-maximizing
level of output and how much profit will this producer
earn if the price of pizza is $0.50 per slice?
Solution to Problem #9 (1)
Price ($/slice)
MC
ATC
AVC
1.18
0.68
0.50
0
260
Quantity (slices/day)
Solution to Problem #9 (2)
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Recall from Problem #7
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If P > ATC > AVC, the firm operates with a profit
If ATC > P > AVC, the firm still operates but with a loss- the
operation can cover part of its cost
If ATC > AVC > P, the firm should shut down as it cannot even
cover part of its cost
Based on the diagram above, where is the firm’s shut
down point in the short run?
The firm should shut down at a point where P = $0.68
per slice (where P = AVC)
If a slice of pizza is sold for only $0.50, the firm will
definitely not produce any pizza and shut down
Solution to Problem #9 (3)
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If the firm shuts down, there will be no (average) variable
cost
By shutting down the plant, the firm will have a negative
profit that is exactly equal to the fixed cost
Fixed cost = Total cost – variable cost
Total cost
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ATC * Q
$1.18 / slice * 260 slices = $306.80 / day
Variable cost
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AVC * Q
$0.68 / slice * 260 slices = $176.80 / day
Solution to Problem #9 (4)
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Fixed cost = $306.80/day - $176.80/day =$130/day
Thus, by shutting down the plant in the short run, the firm
will loss $130 a day
In other words, the firm earns a profit of -$130 per day if
the price for a slice of pizza is just $0.50
The end
Thanks for coming!
See you next week!!!