CRC Economics 1

CRC Economics 2

ExercisesEcon 304

Chapter 13

CRC Economics 3

Do you know …

how to calculate different types of profits?

how to calculate and graph different revenue curves?

how to calculate and graph different product curves?

how to calculate and graph different cost curves?

how to calculate the profit-maximizing output level?

CRC Economics 4

1. How to calculate profits? Given the information below about a

firm:

Answer the questions that follow.

Q =P =

=====

r =

$25,000$150,000$400,000

Market rate of interest

Output (units)Price per unit

$100,000$300,000

$70,00010%

10

Costs of raw materialsValue of investment

Salary (if working for others)

Using own moneyUsing borrowed money

CRC Economics 5

Questions to answerQ =P =

=====

r =

$25,000$150,000$400,000

Market rate of interest

Output (units)Price per unit

$100,000$300,000

$70,00010%

10

Costs of raw materialsValue of investment

Salary (if working for others)

Using own moneyUsing borrowed money

How much is total revenue (TR)?

Formula: TR = P x Q

TR = $25,000 x 10 = $250,000

CRC Economics 6

Questions to answerQ =P =

=====

r =

$25,000$150,000$400,000

Market rate of interest

Output (units)Price per unit

$100,000$300,000

$70,00010%

10

Costs of raw materialsValue of investment

Salary (if working for others)

Using own moneyUsing borrowed money

How much are explicit costs?

Hint: Explicit costs = costs that require money outlay

Explicit costs = Costs of raw materials + Interest costs of borrowed money

Explicit costs = $150,000 + ($300,000x10%) = $180,000

CRC Economics 7

Questions to answerQ =P =

=====

r =

$25,000$150,000$400,000

Market rate of interest

Output (units)Price per unit

$100,000$300,000

$70,00010%

10

Costs of raw materialsValue of investment

Salary (if working for others)

Using own moneyUsing borrowed money

How much are implicit (opportunity) costs?

Hint: Implicit costs = costs that do NOT require money outlay

Implicit costs = Foregone salary + + Foregone interests on own money

Implicit costs = $70,000 + ($100,000x10%) = $80,000

CRC Economics 8

Questions to answerQ =P =

=====

r =

$25,000$150,000$400,000

Market rate of interest

Output (units)Price per unit

$100,000$300,000

$70,00010%

10

Costs of raw materialsValue of investment

Salary (if working for others)

Using own moneyUsing borrowed money

How much are total costs (TC)?

Formula: Total costs = Explicit costs + Implicit costs

TC = $180,000 + $80,000 = $260,000

CRC Economics 9

Questions to answerQ =P =

=====

r =

$25,000$150,000$400,000

Market rate of interest

Output (units)Price per unit

$100,000$300,000

$70,00010%

10

Costs of raw materialsValue of investment

Salary (if working for others)

Using own moneyUsing borrowed money

How much is accounting profit?

Formula: Accounting profit = Total revenue – Explicit costs

Accounting profit = $250,000 - $180,000 = $70,000

CRC Economics 10

Questions to answerQ =P =

=====

r =

$25,000$150,000$400,000

Market rate of interest

Output (units)Price per unit

$100,000$300,000

$70,00010%

10

Costs of raw materialsValue of investment

Salary (if working for others)

Using own moneyUsing borrowed money

How much is economic profit ()?

Formula: Economic profit = Total revenue – Total costs

Economic profit = = $250,000 - $260,000 = -$10,000

CRC Economics 11

Questions to answerQ =P =

=====

r =

$25,000$150,000$400,000

Market rate of interest

Output (units)Price per unit

$100,000$300,000

$70,00010%

10

Costs of raw materialsValue of investment

Salary (if working for others)

Using own moneyUsing borrowed money

Is the business profitable? Why or why not?

Hint: Profitable > 0

The business is NOT profitable, because economic profit = = -$10,000 < 0.

CRC Economics 12

2. How to calculate and graph different revenue curves?

Calculating the revenues of a firm in perfect competition (i.e. a perfectly competitive firm).

Graph the corresponding revenue curves.

Calculating the revenues of a firm in imperfect/no competition.

Graph the corresponding revenue curves.

CRC Economics 13

Given the information below about a firm in perfect competition:

Answer the questions that follow.

a. Perfect competition

Q0

1

2

3

4

5

P$5

$5

$5

$5

$5

$5

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Questions to answerQ0

1

2

3

4

5

P$5

TR

Calculate total revenue (TR), where TR = P x Q.

$5

$5

$5

$5

$5

$0

$5

$10

$15

$20

$25

Calculate average revenue (AR), revenue per unit, where AR = TR / Q.

AR-

$5

$5

$5

$5

$5

MR-

$5

$5

$5

$5

$5

Calculate marginal revenue (MR), the revenue earned when selling one more unit, where MR = TR / Q.

CRC Economics 15

Questions to answer

Q0

1

2

3

4

5

P$5

TR

What are the special features of a firm in perfect competition?

$5

$5

$5

$5

$5

$0

$5

$10

$15

$20

$25

1. Price P is fixed , constant, unchanged.

AR-

$5

$5

$5

$5

$5

MR-

$5

$5

$5

$5

$5

2. (P = AR) = MR (D)

Special notes: (1) P = AR (always); (2) AR is also the firm’s demand curve (D).

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b. Revenue curves of a firm in perfect competition

P

Q

TR = PQ

P = AR= MR (D)$5

1

The TR curve is a straight line.It starts from the point of origin

and slopes upward.

0

The AR and MR curves are also straight lines. They coincide andare horizontal, starting from the

constant price P.

CRC Economics 17

Given the information below about a firm in imperfect/no competition:

Answer the questions that follow.

Imperfect/no competition

Q0

1

2

3

4

5

P$10

$8

$6

$4

$2

$0

CRC Economics 18

Questions to answerQ0

1

2

3

4

5

P$10

TR

Calculate total revenue (TR), where TR = P x Q.

$8

$6

$4

$2

$0

$0

$8

$12

$12

$8

$0

Calculate average revenue (AR), revenue per unit, where AR = TR / Q.

AR-

$8

$6

$4

$2

$0

MR-

$8

$4

$0

-$4

-$8

Calculate marginal revenue (MR), the revenue earned when selling one more unit, where MR = TR / Q.

CRC Economics 19

Questions to answer

Q0

1

2

3

4

5

P$10

TR

$8

$6

$4

$2

$0

$0

$8

$12

$12

$8

$0

AR-

$8

$6

$4

$2

$0

MR-

$8

$4

$0

-$4

-$8

What are the special features of a firm in imperfect/no competition?

1. Price P is variable. To sell more, the firm must lower price.

2. (P = AR) > MR

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b. Revenue curves of a firm in imperfect/no competition

P

Q

P = AR (D)

$8

5

The TR curve is an upside downparabola, starting from the pointof origin. TR is maximized at M.

0

The AR curve is a downward- sloping straight line.

TR = PQM

MRThe MR curve is

also a downward- sloping straight line.

When MR = 0,TR is maximized, at Ed = 1.

Ed = 1

CRC Economics 21

Given the information below about a firm in the short run:

Answer the questions that follow.

3. How to calculate and graph different product curves?

L0

1

2

3

4

5

Q0

6

11

15

18

20

CRC Economics 22

Questions to answer

L0

1

2

3

4

5

Q0

6

11

15

18

20

Calculate average product of labor (APL), where APL= Q / L.

Calculate marginal product of labor (MPL), the product/outputobtained when hiring one more worker, where MPL = Q / L.

APL

-

6.0

5.5

5.0

4.5

4.0

MPL

-

6.0

5.0

4.0

3.0

2.0

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Questions to answerL0

1

2

3

4

5

Q0

6

11

15

18

20

What happens to Q, APL, and MPL, when L rises? Why?

When L rises, i.e. more workers are employed, output Q rises,APL falls, and MPL falls.

APL

-

6.0

5.5

5.0

4.5

4.0

MPL

-

6.0

5.0

4.0

3.0

2.0

The principle of diminishing marginal product of labor takes effect.As L rises, MPL falls, and the production function becomes flatter.

CRC Economics 24

Product curves—TP = Q

Q

LL

TP = Q

MMaximum output

ZZero output

RDiminishing return point

SShutdown point

Where the law of diminishingreturns takes effect.

The tangent line goes throughthe curve.

Where a line from the point oforigin is tangent to the curve. Relevant section

CRC Economics 25

L

Product curves—AP & MP

Q

L

AP

M Z

R

SMP Relevant section

CRC Economics 26

Given the information below about a firm in the short run, where Q = output, FC = fixed cost, and VC = variable cost.

Answer the questions that follow.

4. How to calculate and graph different cost curves?

Q012345

FC$16

6789

10

VC$0

$18$31$41$49$59$72$90

$114$145$184

CRC Economics 27

Questions to answerQ012345

FC$16$16$16$16$16$16

6 $167 $168 $169 $16

10 $16

VC$0

$18$31$41$49$59$72$90

$114$145$184

What is FC at other levels of output?

Hint: FC is fixed at all levels of output.

CRC Economics 28

Questions to answerQ012345

FC$16$16$16$16$16$16

6 $167 $168 $169 $16

10 $16

VC$0

$18$31$41$49$59$72$90

$114$145$184

Calculate total cost, TC, where TC = FC + VC.

Calculate average fixed cost, AFC, where AFC = FC / Q.

TC$16$34$47$57$65$75$88

$106$130$161$200

Calculate average variable cost, AVC, where AVC = VC / Q.

AFC-

$16.0$8.0$5.3$4.0$3.2

AVC-

$18.0$15.5$13.7$12.3$11.8

$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4

CRC Economics 29

Questions to answerQ012345

FC$16$16$16$16$16$16

6 $167 $168 $169 $16

10 $16

VC$0

$18$31$41$49$59$72$90

$114$145$184

Calculate average total cost, ATC, where ATC = TC / Q = AFC + AVC.

Calculate marginal cost, MC, the cost of producing one more unit, where MC = VC / Q = TC / Q.

TC$16$34$47$57$65$75$88

$106$130$161$200

AFC-

$16.0$8.0$5.3$4.0$3.2

AVC-

$18.0$15.5$13.7$12.3$11.8

$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4

ATC-

$34.0$23.5$19.0$16.3$15.0

MC-

$18.0$13.0$10.0$8.0

$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0

CRC Economics 30

Questions to answerQ012345

FC$16$16$16$16$16$16

6 $167 $168 $169 $16

10 $16

VC$0

$18$31$41$49$59$72$90

$114$145$184

Is there a minimum value for AFC?

No, AFC has no minimum. As Q rises, AFC falls.

TC$16$34$47$57$65$75$88

$106$130$161$200

AFC-

$16.0$8.0$5.3$4.0$3.2

AVC-

$18.0$15.5$13.7$12.3$11.8

$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4

ATC-

$34.0$23.5$19.0$16.3$15.0

MC-

$18.0$13.0$10.0$8.0

$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0

CRC Economics 31

Questions to answerQ012345

FC$16$16$16$16$16$16

6 $167 $168 $169 $16

10 $16

VC$0

$18$31$41$49$59$72$90

$114$145$184

Is there a minimum value for MC?

Yes, the minimum point of MC (point R) occurs where P =$8.0, and Q = 4. MC falls, reaches the minimum, then rises.

The MC curve is U-shaped.

TC$16$34$47$57$65$75$88

$106$130$161$200

AFC-

$16.0$8.0$5.3$4.0$3.2

AVC-

$18.0$15.5$13.7$12.3$11.8

$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4

ATC-

$34.0$23.5$19.0$16.3$15.0

MC-

$18.0$13.0$10.0$8.0

$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0

CRC Economics 32

Questions to answerQ012345

FC$16$16$16$16$16$16

6 $167 $168 $169 $16

10 $16

VC$0

$18$31$41$49$59$72$90

$114$145$184

Is there a minimum value for AVC?

Yes, the minimum point of AVC (point S) occurs where P =$11.8, and Q = 5. AVC falls, reaches a minimum, then rises.

The AVC curve is U-shaped.

TC$16$34$47$57$65$75$88

$106$130$161$200

AFC-

$16.0$8.0$5.3$4.0$3.2

AVC-

$18.0$15.5$13.7$12.3$11.8

$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4

ATC-

$34.0$23.5$19.0$16.3$15.0

MC-

$18.0$13.0$10.0$8.0

$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0

CRC Economics 33

Questions to answerQ012345

FC$16$16$16$16$16$16

6 $167 $168 $169 $16

10 $16

VC$0

$18$31$41$49$59$72$90

$114$145$184

Is there a minimum value for ATC?

Yes, the minimum point of ATC (point B) occurs where P =$14.7, and Q = 6. ATC falls, reaches a minimum, then rises.

The ATC curve is U-shaped.

TC$16$34$47$57$65$75$88

$106$130$161$200

AFC-

$16.0$8.0$5.3$4.0$3.2

AVC-

$18.0$15.5$13.7$12.3$11.8

$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4

ATC-

$34.0$23.5$19.0$16.3$15.0

MC-

$18.0$13.0$10.0$8.0

$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0

CRC Economics 34

Q

Cost curves—FC, VC, and TC

$

Q

FC

VC

TC

R

R

S

B

Point B is where a line from the point of origin is tangent to the

TC curve. It is called thebreakeven point (in PC).

Point S is where a line from the point of origin is tangent to the

VC curve. It is called theshutdown point (in PC).

CRC Economics 35

Q

Cost curves—AVC, ATC, and MC $

Q

AVC

ATCMC

RS

B

CRC Economics 36

Q

Cost curves (in perfect competition)

$

Q

AVC

ATCMC

RS

BPbr

Psh

Breakeven price

Shutdown price

CRC Economics 37

Given the following information for a firm:

Answer the questions that follow.

4. How to calculate the profit-maximizing output level, Q*?

Q012345

P$60$60$60$60$60$60

6 $607 $608 $609 $60

10 $60

TC$30$42$66

$102$150$210$282$366$462$570$690

CRC Economics 38

Questions to answerQ012345

P$60$60$60$60$60$60

6 $607 $608 $609 $60

10 $60

TR$0

$60$120$180$240$300$360$420$480$540$600

Calculate TR and economic profit, , where = TR – TC.

TC$30$42$66

$102$150$210$282$366$462$570$690

-$30$18$54$78$90$90

MR-

$78$54$18-$30-$90

MC-

$12$24$36$48$60

M-

$48$36$24$12$0

$72 -$12$84 -$24$96 -$36

$108 -$48$120 -$60

$60$60$60$60$60$60$60$60$60$60

Calculate MR, MC, and M, where M = MR – MC.

CRC Economics 39

Questions to answerQ012345

P$60$60$60$60$60$60

6 $607 $608 $609 $60

10 $60

TR$0

$60$120$180$240$300$360$420$480$540$600

What is the profit-maximizing output level, Q*?

TC$30$42$66

$102$150$210$282$366$462$570$690

-$30$18$54$78$90$90

MR-

$78$54$18-$30-$90

MC-

$12$24$36$48$60

M-

$48$36$24$12$0

$72 -$12$84 -$24$96 -$36

$108 -$48$120 -$60

$60$60$60$60$60$60$60$60$60$60

Hint: Q* is produced where M = 0, or MR = MC.

Q* = 5, where = $90, and MR = MC = $60.

CRC Economics 40

Graphical approach

$0

$20

$40

$60

$80

$100

$120

$140

0 2 4 6 8 10 12

$

Q

MC

MR

Q*

E

Q* is found on the quantity axis where MR = MC.

CRC Economics 41

Now you know …

how to calculate different types of profits.

how to calculate and graph different revenue curves.

how to calculate and graph different product curves.

how to calculate and graph different cost curves.

how to calculate the profit-maximizing output level.

CRC Economics 42