Question 1

Following Example 8.8 in the book, the long-run supply of rental housing in most U.S. communities is more inelastic than the long-run supply of owner-occupied housing. Why?
A) Local rental housing regulations
B) Limited demand for rental housing
C) Limitations on the urban land available for rental housing
D) A and C above are correct

Accepted Answer

Rental housing regulations and limitations on available urban land can make it more difficult and costly for developers to build rental housing, leading to a more inelastic supply in the long run. In contrast, owner-occupied housing may be more easily built in suburban areas with more available land, leading to a more elastic supply in the long run. Additionally, limited demand for rental housing may also contribute to a more inelastic supply, but this is not as significant a factor as regulations and land limitations.

Question 2

Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?
A) The price paid by buyers increases and output declines
B) The price paid by buyers does not change and output decrease
C) The price paid by buyers and output increase
D) The price paid by buyers and output decrease

Accepted Answer

In a perfectly elastic market demand curve, any increase in cost will be passed on entirely to the producers. Therefore, the output tax of t per unit will increase the cost of production for all producers by the same amount. As a result, the supply curve will shift upward by t per unit of output. Since the demand curve is perfectly elastic, the price paid by buyers will not change, but the output of the good will decrease. Thus, the equilibrium outcome will be a decrease in output without any change in price.

Question 3

In the long-run equilibrium of a competitive market, the market supply and demand are:
Supply: P = 30 + 0.50Q
Demand: P = 100 - 1.5Q,
where P is dollars per unit and Q is rate of production and sales in hundreds of units per day. A typical firm in this market has a marginal cost of production expressed as:
MC = 3.0 + 15q.
a. Determine the market equilibrium rate of sales and price.
b. Determine the rate of sales by the typical firm.
c. Determine the economic rent that the typical firm enjoys. (Hint: Note that the marginal cost function is linear.)
d. If an output tax is imposed on ONE firm's output such that the ONE firm has a new marginal cost (including the tax) of:
MCt = 5 + 15q,
what will the firm's new rate of production be after the tax is imposed? How does this new production rate compare with the pre-tax rate? Is it as expected? Explain. Would the effect have been the same if the tax had been imposed on all firms equally? Explain.

Accepted Answer

The answer of In the long-run equilibrium of a competitive...

Question 4

Consider a competitive market in which the market demand for the product is expressed as
P = 75 - 1.5Q,
and the supply of the product is expressed as
P = 25 + 0.50Q.
Price, P, is in dollars per unit sold, and Q represents rate of production and sales in hundreds of units per day. The typical firm in this market has a marginal cost of
MC = 2.5 + 10q.
a. Determine the equilibrium market price and rate of sales.
b. Determine the rate of sales of the typical firm, given your answerto part (a) above.
c. If the market demand were to increase to P = 100 - 1.5Q, what would the new price and rate of sales in the market be? What would the new rate of sales for the typical firm be?
d. If the original supply and demand represented a long-run equilibrium condition in the market, would the new equilibrium (c) represent a new long-run equilibrium for the typical firm? Explain.

Accepted Answer

The answer of Consider a competitive market in which the...

Question 5

The manufacturing of paper products causes damage to a local river when the manufacturing plant produces more than 1,000 units in a period. To discourage the plant from producing more than 1,000 units, the local community is considering placing a tax on the plant. The long-run cost curve for the paper producing firm is: C(q, t) =  
+ tq, where q is the number of units of paper produced and t is the per unit tax on paper production. The relevant marginal cost curve is:
MC(q, t) =  
+ t. If the manufacturing plant can sell all of its output for $2, what is the firm's optimal output if the tax is set at zero? What is the minimum tax rate necessary to ensure that the firm produces no more than 1,000 units? How much are the firm's profits reduced by the presence of a tax?

Accepted Answer

The answer of The manufacturing of paper products causes damage...

Question 6

The demand curve and long-run supply curve for carpet cleaning in the local market are: Q_D = 1,000 - 10P and Q_S = 640 + 2P. The long-run cost function for a carpet cleaning business is: C(q) = 3q². The long-run marginal cost function is: MC(q) = 6q. If the carpet cleaning business is competitive, calculate the optimal output for each firm. How many firms are in the local market? Is the carpet cleaning industry an increasing, constant, or decreasing cost industry?

Accepted Answer

The answer of The demand curve and long-run supply curve...

Question 7

In the robotics industry there are 100 firms. Each firm shares the same long-run cost function. It is: C(q) = 100 . The relevant marginal cost function is MC(q) = . Each of the 100 firms produce 64 units. The market demand for robotics is: Q_D = 15,000 - 688P. Calculate the market price at this production level. Also, calculate the profits for a representative firm in the robotics industry. If one firm expanded production to 100 units while the remaining 99 firms kept output at 64 units, what would happen to the market price and profits? Would all firms benefit or lose if every firm expanded output to 100 units?

Accepted Answer

The answer of In the robotics industry there are 100...

Question 8

The demand for pizzas in the local market is given by: Q_D = 25,000 - 1,500P. There are 100 pizza firms currently in the market. The long-run cost function for each pizza firm is: C(q, w) = wq, where w is the wage rate pizza firms pay for a labor hour and q is the number of pizzas produced. The marginal cost function for each firm is: MC(q, w) = w. If the current wage rate is $7 and the industry is competitive, calculate the optimal output of each firm given each firm produces the same level of output. Do you anticipate firms entering or exiting the pizza industry? Suppose that the wage rate increases to $8.40. Calculate optimal output for each of the 100 firms. Do you anticipate firms entering or exiting the pizza industry? What happens to the market output of pizzas with the higher wage rate? What happens to the market price for pizza?

Accepted Answer

The answer of The demand for pizzas in the local...

Question 9

Bud Owen operates Bud's Package Store in a small college town. Bud sells six packs of beer for off-premises consumption. Bud has very limited store space and has decided to limit his product line to one brand of beer, choosing to forego the snack food lines that normally accompany his business. Bud's is the only beer retailer physically located within the town limits. He faces considerable competition, however, from sellers located outside of town. Bud regards the market as highly competitive and considers the current $2.50 per six pack selling price to be beyond his control. Bud's total and marginal cost functions are: TC = 2000 + 0.0005Q² MC = 0.001Q, where Q refers to six packs per week. Included in the fixed cost figure is a $750 per week salary for Bud, which he considers to be his opportunity cost. a. Calculate the profit maximizing output for Bud. What is his profit? Is this an economic profit or an accounting profit? b. The town council has voted to impose a tax of $.50 per six pack sold in the town, hoping to discourage beer consumption. What impact will the tax have on Bud? Should Bud continue to operate? What impact will the tax have on Bud's out-of-town competitors?

Accepted Answer

The answer of Bud Owen operates Bud's Package Store in...

Quiz 8: Profit Maximization and Competitive Supply

Following Example 8.8 in the book, the long-run supply of rental housing in most U.S. communities is more inelastic than the long-run supply of owner-occupied housing. Why?

Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?