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Homwork Eco

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Submitted By johndeeregreen1
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Homework #3
April 7, 2011

1) The profit maximization rule for determining the most efficient output level is considered through marginal revenue, and marginal cost. The point at which profit is being maximized is when the revenue gained from selling one additional unit is equal to the cost of producing the unit. At this point, the firm is receiving an average rate of return at the highest output level possible. For example, a shoe producer pays $25 to produce one shoe and can sell the shoe for $50. At this output level the marginal profit is $25 and the profit maximization rule would dictate an increase in output. Inversely, had it cost the show maker $60 to make one additional shoe and could only sell the shoe for $50 the profit maximization rule would dictate a decrease in output. Following profit, marginal revenue would be -$10 and the maximization rule always leads to maximum profit when marginal revenue is equal to marginal cost, the highest output level attainable without losing money to produce the product.

2) STEPS 1. Begin at initial long-run equilibrium 2. Income elasticity is -1.3 and consumers income decreases 3. Quantity demanded decreases 4. Price is bid downward and the firm is faced with a new marginal revenue 5. If the consumers’ income does not recover over time the LRAC curve will fall downward 6. In response to the market, the firm will decrease output until marginal revenue equals marginal cost 7. π=Q(P-LRAC)<0 creating a below normal rate of return (considering LRAC) 8. This stimulates an exit from the market, shifting SRIS curve inward 9. This will continue until π=0

COMPARITIVE STATIC 1. The Price is constant 2. The Industry output decreased (Q3) 3. The Firms output is constant 4. . π is constant 5. The number of firms decreased

3)

Potatoes Steps

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