Final Exam Essay/Math Questions

Under what conditions will a firm shut down temporarily? Explain

• When Price < Average Total Cost

• Continuing production will just lead to greater losses

Why is a monopolist’s marginal revenue less than the price of the good? Can marginal revenue ever be negative? Explain

• Marginal revenue is less than the price because a monopoly faces a downward sloping demand curve. In order to sell more, the monopoly must lower the price it charges to all customers.

• Marginal Revenue can be negative because when the price effect outweighs the quantity effect, total revenue falls, and marginal revenue becomes negative.

Buffy is thinking about opening an amulet store. She estimates that it would cost $350,000 per year to rent the location and buy the merchandise. In addition, she would have to quit her $80,000 per year job as a vampire hunter.

What is Buffy’s opportunity cost of running the store for a year?

350,000 + 80,000 = 430,000

Buffy is thinking about opening an amulet store. She estimates that it would cost $350,000 per year to rent the location and buy the merchandise. In addition, she would have to quit her $80,000 per year job as a vampire hunter.

Buffy thinks she can sell $400,000 worth of amulets in a year. What would her accountant consider the store’s profit?

400,000 – 35,000 = 50,000

Buffy is thinking about opening an amulet store. She estimates that it would cost $350,000 per year to rent the location and buy the merchandise. In addition, she would have to quit her $80,000 per year job as a vampire hunter.

Should Buffy open the store? As her economist, advise her.

400,000 – 430,000 = -30,000; she should not open the store

Buffy is thinking about opening an amulet store. She estimates that it would cost $350,000 per year to rent the location and buy the merchandise. In addition, she would have to quit her $80,000 per year job as a vampire hunter.

How much revenue would the store need to generate for Buffy to earn positive economic profit

430,000

Explain, in detail, the difference between a perfectly competitive firm and a monopolist.

Competitive firm:

• many buyers + sellers

• identical goods

• price takers

• free entry and exit

Monopolist

• single seller

• no close substitutes

• price makers

• barriers to entry

Below which price will the firm shut down in the short run?

Below P2

What is the least quantity of output the firm will produce if it does not shut down?

Q = 8

Consider that the firm is in the short run. Describe the firm’s supply curve from the figure above. (State explicitly which curve describes it, where it starts from and suchlike).

The firm’s supply curve is the portion of the MC curve above the AVC curve (starts at point b)

As an economist, you realize that the firm is producing at quantity = 5? What advice would you give the firm?

Firm should shut down

Which letter represents the profit-maximizing quantity chosen by the single price monopolist?

I

Which letter represents the profit-maximizing price chosen by the single price monopolist?

B

Use the letters in the figure to identify the profit area for the single price monopolist.

Area BEFC

Use the letters in the figure to identify the area of deadweight loss for the single price monopolist.

Area EFG