Module 6 Quiz Flashcards
Suppose the price is P1. The optimal output is ________ and profits are _______.
Q1; positive
First, we find where the price crosses the Marginal cost line. This is at Q1. Then we compare the price (P1) to the average cost at Q1. Since the price is higher than the average costs, profits are positive. That is, the price you receive for your sale is higher than the average cost of production and so revenues will exceed costs.
Suppose the price is P2. The optimal output is ________ and profits are _______.
Q2; zero
First, we find where the price crosses the Marginal cost line. This is at Q2. Then we compare the price (P2) to the average cost at Q2. Since the price is equal to the average costs, profits are zero. That is, the price you receive for your sale is equal to the average cost of production and so revenues will equal costs.
Suppose the price is P3. The optimal output is ________ and profits are _______.
Q3; negative
As above, output falls to Q3 but now average costs are higher than the price so profits are negative. But now we have to think about shut-down. At P3, price is above average variable costs and so the firm will still make a profit on its variable inputs and so will remain open. Eg, it can cover some of its fixed
costs.
Suppose the price is P4. The optimal output is ________ and profits are _______.
Q4; negative
Same as for P3 except now we have P = AVC. The firm is breaking even and covering all its variable costs but none of its fixed costs.
Suppose the price is P5. The optimal output is ________ and profits are _______.
0; negative
The firm shuts down and produces Q = 0. Here, the price is lower than its average variable costs and so it is losing profits on its variable inputs. It can reduces its losses by shutting down though it still has to pay all of its fixed costs
The supply curve is the __________ above price _________.
Marginal cost curve ; p4
The firm chooses q where P = MC. As long as the prices is above average variable costs, the firm stays open. Once the price falls below AVC, then the firm chooses Q=0.
The firm’s breakeven price is _________.
P2
At P2, the output is Q2 but we have P =AC and so profits equal zero. The firm is breaking even. Any lower price leads to less output and negative profits. Any higher leads to higher output and positive
profits.
The firm’s shutdown price is _________.
P4
At P4, the output is Q4 but we have P =AVC and so profits are negative. The firm is just breaking even on its variable inputs and cannot cover any fixed costs. Any lower price leads to less output and worse losses and the firm will shut down. Any higher price still may have negative profits but at least the firm can payoff some fixed costs.
Suppose wages fell for this firm and the price was P2, then output would ______ and profits would be ___.
rise; positive
A fall in wages will do two things. First is it lowers marginal costs (ie shifts it down and to the right). This leads to greater output since we must maintain P = MC. Second, the fall in wages leads to a fall in average costs (since AVC = W/APL and AC = AVC + AFC). So, at P2, we now have P > AC and so profits will go from zero to a positive amount.
Suppose the firm instituted better management techniques that improved productivity, then average variable costs would ______ and the firm’s breakeven price would ______.
fall; fall
As in 9. Higher productivity will lower MC and also AVC (since AVC = W/APL). The firm can then produce more. But this also means average costs fall and so the price that would generate profits equal to zero also falls. Similarly, the AVC falls and so the shutdown price falls. EG: with higher productivity, the firm can withstand lower prices since each worker it hires produces more and so generates more revenue.
Suppose fixed costs for the firm rose (say to a rise in rent for their office), the firm’s shutdown price will _________.
be unchanged
Fixed costs do not alter marginal costs or variable costs. So it has no effect on output or on the shutdown price.
Suppose fixed costs for the firm rose (say to a rise in rent for their office), the firm’s breakeven price will ____________.
rise
Fixed costs do not alter marginal costs or variable costs but they do affect average costs. A rise in fixed costs will raise average fixed costs and so raise average costs (eg AC = AVC + AFC). So it has no effect on
output but raises the breakeven price as we need more revenue to offset the higher fixed costs..
Consider the figure above for a Monopolist. The monopolist’s optimal output is ________.
Q1
We need to find the output where marginal revenue equals marginal costs. This is at Q1. Since we meet the optimality condition, we are maximizing profits.
Consider the figure above for a Monopolist. The monopolist’s optimal price is ________.
P1
Optimal output is at Q1. We now find the price on the demand curve that will allow the firm to sell its output. This is at P1.
Consider the figure above for a Monopolist. A rise in productivity will ____.output and ____.prices
raise; lower
A rise in productivity lowers marginal costs. This intersects the marginal revenue curve further to the right so implies more output.
But if we try to sell more, the price has to fall along the demand curve.
Consider the figure above for a Monopolist. At the monopolist’s optimal output, profits are ________.
Positive
As with the Perfectly Competitive case, we first find optimal output (at Q1). Then we find optimal price (P1). We then compare the price to average costs. In this case, the price is above average costs and so profits are positive.
Consider the figure above for a Monopolist. The monopolist’s optimal output ________.
Is inefficient since it creates a deadweight loss
The monopolist chooses to produce at Q1 and charge P1. But at this output, the consumers’ willingness to pay for one more good (which is equal to P1) is higher than the additional cost of producing one more good (measured by the marginal cost curve). Since P > MC, raising output will raise WTP more than costs and so social surplus will rise. Hence we have a market failure and an associated DWL.
