Chapter 14 Checkpoint

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(No Transcript)
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15
Perfect Competition
CHECKPOINTS
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Checkpoint 15.1
Checkpoint 15.2
Checkpoint 15.3
Problem 1
Problem 1
Clicker version
Problem 1
Problem 2
Problem 2
Problem 2
Clicker version
Clickerversion
Problem 3
Problem 3
Clicker version
In the news
Problem 4
Clickerversion
In the news
In the news
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CHECKPOINT 15.1

• Practice Problem 1
• Sarahs Salmon Farm produced 1,000 fish last
  week.
• The marginal cost was 30 a fish, average
  variable cost was 20 a fish, and the market
  price was 25 a fish.
• Did Sarah maximize profit?
• If Sarah did not maximize profit and if nothing
  has changed, will she increase or decrease the
  number of fish she produces to maximize her
  profit this week?

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CHECKPOINT 15.1

• Solution
• Profit is maximized when marginal cost equals
  marginal revenue.
• In perfect competition, marginal revenue equals
  the market price and is 25 a fish.
• Because marginal cost exceeded marginal revenue,
  Sarah did not maximize profit.
• To maximize profit, Sarah will decrease her
  output until marginal cost falls to 25 a fish.

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Study Plan ProblemSarahs Salmon Farm produced
1,000 fish last week.The marginal cost was 30 a
fish, average variable cost was 20 a fish, and
the market price was 25 a fish. Did Sarah
maximize profit? If not, and nothing has changed,
will she increase or decrease the this week?
CHECKPOINT 15.1

1. Not maximizing increase
2. Maximizing not change
3. Maximizing increase
4. Not maximizing decrease

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CHECKPOINT 15.1

• Practice Problem 2
• Trout farming is a perfectly competitive industry
  and all trout farms have the same cost curves.
• When the market price is 25 a fish, farms
  maximize profit by producing 200 fish a week.
• At this output, average total cost is 20 a fish,
  and average variable cost is 15 a fish.
• Minimum average variable cost is 12 a fish.
• If the price falls to 20 a fish, will the trout
  farm produce 200 fish a week? Why or why not?

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CHECKPOINT 15.1

• Solution
• The marginal cost increases as the farm produces
  more fish.
• To lower its marginal cost from 25 to 20 a
  fish, the farm cuts production.
• Because the price exceeds minimum average
  variable cost, which is 12 a fish, she will cut
  production but still produce fish.
• If the price falls to from 25 to 20 a fish, the
  farm will produce fewer than 200 fish a week.

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Study Plan Problem Trout farming is perfectly
competitive and all farms have the same costs.
When the market price is 25 a fish, farms
maximize profit by producing 200 fish a week.
Average total cost is 20 a fish, and average
variable cost is 15 a fish. Minimum average
variable cost is 12 a fish.If the price falls
to 20 a fish, the trout farm will _______.
CHECKPOINT 15.1

1. produce fewer than 200 fish a week
2. continue to produce 200 fish a week
3. produce more than 200 fish a week
4. stop producing until the price returns to 25 a
   fish

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CHECKPOINT 15.1

• Practice Problem 3
• Trout farming is a perfectly competitive industry
  and all trout farms have the same cost curves.
• When the market price is 25 a fish, farms
  maximize profit by producing 200 fish a week.
• At this output, average total cost is 20 a fish,
  and average variable cost is 15 a fish.
• Minimum average variable cost is 12 a fish.
• If the price falls to 12 a fish, what will the
  trout farm do?

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CHECKPOINT 15.1

• Solution
• If the price falls to 12 a fish, farms cut
  production to the quantity at which marginal cost
  equals 12.
• But, because 12 is minimum average variable
  cost, this price puts farms at the shutdown
  point.
• Farms are indifferent between producing the
  profit-maximizing output (something less than 200
  fish a week) and shutting down (producing
  nothing).

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Study Plan Problem Trout farming is perfectly
competitive and all farms have the same costs.
When the market price is 25 a fish, farms
maximize profit by producing 200 fish a week.
Average total cost is 20 a fish, and average
variable cost is 15 a fish. Minimum average
variable cost is 12 a fish.If the price falls
to 12 a fish, the farm will ______.
CHECKPOINT 15.1

1. produce the profit-maximizing output
2. shut down
3. continue to produce 200 fish a week
4. attempt to raise the price back to 25 a fish
5. produce either the profit-maximizing output or
   nothing

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CHECKPOINT 15.1

• Practice Problem 4
• Trout farming is a perfectly competitive industry
  and all trout farms have the same cost curves.
• When the market price is 25 a fish, farms
  maximize profit by producing 200 fish a week.
• At this output, average total cost is 20 a fish,
  and average variable cost is 15 a fish.
• Minimum average variable cost is 12 a fish.
• What are two points on the trout farms supply
  curve?

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CHECKPOINT 15.1

• Solution
• One point on the farmers supply curve is the
  profit-maximizing output of 200 fish a week when
  the market price is at 25 a fish.
• Another point on the farmers supply curve is the
  shutdown pointoutput is zero when the market
  price is 12 a fish or the profit-maximizing
  output at 12 a fish.

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CHECKPOINT 15.1

• In the news
• BHP Billiton to axe 6,000 jobs
• The price of coal has fallen to 125 a ton from
  300 a ton. BHP Billiton will cut production, lay
  off 6,000 workers, and close some mines for six
  months.
• Source FT.com, January 21, 2009
• As BHP responded to the fall in price, how did
  its marginal cost change?
• What is minimum average variable cost in the
  mines that closed?

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CHECKPOINT 15.1

• Solution
• Marginal cost decreased from 300 a ton to 125 a
  ton.
• The mines that closed temporarily were at the
  shutdown point, so minimum average variable cost
  is 125 a ton.

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Study Plan Problem Trout farming is perfectly
competitive and all farms have the same costs.
When the market price is 25 a fish, farms
maximize profit by producing 200 fish a week.
Average total cost is 20 a fish, and average
variable cost is 15 a fish. Minimum average
variable cost is 12 a fish.Two points on the
farms supply curve are ______.
CHECKPOINT 15.1

1. 200 fish at 9 a fish 0 fish at 25 a fish
2. 200 fish at 25 a fish 0 fish at 9 a fish
3. 200 fish at 20 a fish 0 fish at 15 a fish
4. 200 fish at 25 a fish 0 fish at 15 a fish
5. 200 fish at 15 a fish 0 fish at 9 a fish

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CHECKPOINT 15.2

• Practice Problem 1
• Tulip growing is a perfectly competitive
  industry, and all tulip growers have the same
  cost curves. The market price of tulips is 25 a
  bunch, and each grower maximizes profit by
  producing 2,000 bunches a week.
• The average total cost of producing tulips is 20
  a bunch, and the average variable cost is 15 a
  bunch.
• Minimum average variable cost is 12 a bunch.
• What is the economic profit that each grower is
  making in the short run?

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CHECKPOINT 15.2

• Solution
• The figure illustrates the situation when a
  grower produces 2,000 bunches a week.
• The growers marginal revenue equals the market
  price (25).
• The grower produces 2,000 bunches and is
  maximizing profit.
• That is, marginal cost equals marginal revenue at
  2,000 bunches a week.

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CHECKPOINT 15.2

• The market price (25) exceeds the average total
  cost (20), so growers are making an economic
  profit of 5 a bunch.
• The economic profit on 2,000 bunches is 10,000 a
  week.

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CHECKPOINT 15.2

• Practice Problem 2
• Tulip growing is a perfectly competitive
  industry, and all tulip growers have the same
  cost curves.
• The market price of tulips is 25 a bunch, and
  each grower maximizes profit by producing 2,000
  bunches a week.
• The average total cost of producing tulips is 20
  a bunch, and the average variable cost is 15 a
  bunch.
• Minimum average variable cost is 12 a bunch.
• What is the price at the growers shutdown point?

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CHECKPOINT 15.2

• Solution
• The grower will shut down temporarily if the
  price falls so that it cannot cover its total
  variable cost (the cost of its labor).
• The price at the shutdown point equals minimum
  average variable cost, which is 12 a bunch.

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CHECKPOINT 15.2

• Practice Problem 3
• Tulip growing is a perfectly competitive
  industry, and all tulip growers have the same
  cost curves. The market price of tulips is 25 a
  bunch, and each grower maximizes profit by
  producing 2,000 bunches a week.
• The average total cost of producing tulips is 20
  a bunch, and the average variable cost is 15 a
  bunch.
• Minimum average variable cost is 12 a bunch.
• What is the growers economic profit at the
  shutdown point?

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CHECKPOINT 15.2

• Solution
• At the shutdown point, the grower incurs an
  economic loss equal to total fixed cost.
• What is TFC?
• When 2,000 bunches a week are grown, ATC is 20 a
  bunch and AVC is 15 a bunch.
• So when 2,000 bunches a week are grown, AFC is 5
  a bunch.

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CHECKPOINT 15.2

• Total fixed cost equals 10,000 a week5 a bunch
  x 2,000 bunches a week.
• So at the shutdown point, the grower incurs an
  economic loss equal to 10,000 a week.

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CHECKPOINT 15.2

• In the news
• Corn hits record high price
• Corn prices have surged 80 percent in the past
  year, driven up by a global rush for grains to
  feed people and livestock and to make biofuel.
• Source USA Today, June 26, 2008
• Explain why the price of corn surged in the short
  run.
• Explain how the farmers marginal revenue,
  marginal cost of producing corn, economic profit
  on a ton of corn, and the farmers economic
  profit changed.

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CHECKPOINT 15.2

• Solution
• An increase in the market demand for corn
  increased the market price.
• The market for corn is competitive, so the
  farmers marginal revenue equals the market
  price. The marginal revenue increased.
• The farmer maximizes profit by producing the
  quantity at which marginal revenue equals
  marginal cost.
• Because marginal revenue has increased, the
  farmer increases the quantity produced.

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CHECKPOINT 15.2

• As the farmer increases the quantity produced, he
  moves up along his MC curve.
• Economic profit on a ton of corn (the market
  price minus the marginal cost of producing it)
  increases.
• In the short run, economic profit increases.

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CHECKPOINT 15.3

• Practice Problem 1
• Tulip growing is a perfectly competitive
  industry, and all tulip growers have the same
  cost curves. The market price of tulips is 15 a
  bunch, and each grower maximizes profit by
  producing 1,500 bunches a week.
• The average total cost of producing tulips is 21
  a bunch. Minimum average variable cost is 12 a
  bunch, and the minimum average total cost is 18
  a bunch.
• What is a growers economic profit in the short
  run and how does the number of tulip growers
  change in the long run?

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CHECKPOINT 15.3

• Solution
• The market price (15) is less than average total
  cost (21), so the tulip grower is incurring an
  economic loss in the short run.
• Because the market price exceeds minimum average
  variable cost, the grower continues to produce.
• Economic loss equals the loss per bunch (6)
  multiplied by 1,500 bunches, which equals 9,000.

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CHECKPOINT 15.3

• Because growers are incurring economic losses in
  the short run, some growers will exit the
  industry in the long run.
• So in the long run, there will be fewer tulip
  growers.

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CHECKPOINT 15.3

• Practice Problem 2
• Tulip growing is a perfectly competitive
  industry, and all tulip growers have the same
  cost curves.The market price of tulips is 15 a
  bunch, and each grower maximizes profit by
  producing 1,500 bunches a week.
• The average total cost of producing tulips is 21
  a bunch. Minimum average variable cost is 12 a
  bunch, and the minimum average total cost is 18
  a bunch.
• In the long run, what is the market price and
  what is the growers economic profit?

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CHECKPOINT 15.3

• Solution
• As some farms stop growing tulips, the market
  supply of tulips decreases and the market price
  rises.
• Growers will continue to exit the industry until
  economic losses are eliminated.
• In the long run, the price will be such that
  economic profit is zero.
• In long-run equilibrium, the price will be 18 a
  bunch.

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Study Plan ProblemTulip growing is a perfectly
competitive industry. The market price is 15 a
bunch, and each grower maximizes profit by
producing 1,500 bunches a week. The ATC is 21 a
bunch, minimum AVC is 12 a bunch, and minimum
ATC is 18 a bunch.In the long run, the price is
___ and a grower makes ___.
CHECKPOINT 15.3

1. 18 a bunch zero economic profit
2. 57 a bunch positive economic profit
3. 15 a bunch zero economic profit
4. 18 a bunch positive economic profit
5. 21 a bunch zero economic profit

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CHECKPOINT 15.3

• In the news
• Cotton farmers face a formidable foe
• The growing season has just begun and pigweed is
  spreading quickly, towering above the cotton
  plants, and crowding out the sunlight. This is a
  new breed of pigweed that is resistant to
  herbicides. Scientists estimate that thousands of
  acres have already been plowed back, and that it
  could cost 20 an acre to fend off the weed.
• Source USA Today, July 18, 2008
• How will the cost of growing cotton change? What
  effect will this weed have on the cotton market
  in the short run?

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CHECKPOINT 15.3

• In the long run, will farmers switch to growing
  cotton or switch from cotton to some other crop?
• How will the cotton market change in the long run?

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CHECKPOINT 15.3

• Solution
• To produce any cotton, farmers will have to incur
  the cost of spraying20 an acre. This cost is a
  fixed cost, so the farmers marginal cost does
  not change.
• With acres of cotton already plowed back, the
  market supply of cotton will decrease in the
  short run and the market price will rise.
• To maximize profit, farmers produce the quantity
  at which marginal revenue equals marginal cost.
  With a higher price and no change in marginal
  cost, farmers with a crop will make positive
  economic profit.

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CHECKPOINT 15.3

• Because farmers with a crop make positive
  economic profit, new farmers will enter the
  cotton-growing industry.
• As new farmers enter the market, the market price
  of cotton will fall.
• New farmers will continue to enter the market and
  the price will continue to fall until farmers are
  making zero economic profit.
• In long-run equilibrium, cotton farmers will make
  zero economic profit.