Question
1. A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10. What is the average revenue, and how
1. A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10. What is the average revenue, and how many units were sold?
Average Revenue (AR) is equal to Total Revenue (TR) divided by the quantity sold (Q). Given that TR is $500 and marginal revenue (MR) is $10, the firm sells 50010=5010500=50 units. Therefore, the average revenue is $10 per unit.
2. A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed cost of $200.
a. Profit can be calculated as follows: Profit=(AverageRevenueAverageCost)QuantityProfit=(AverageRevenueAverageCost)Quantity =(108)100=200=(108)100=200 So, the profit is $200. Marginal Cost (MC) is the change in total cost due to producing one more unit. Since average total cost is $8 for 100 units and $10 for 101 units, MC is $10 - $8 = $2. Average Variable Cost (AVC) is the variable cost per unit of output. Since average total cost is $8 and fixed cost is $200, AVC is $8 - $2 = $6.
b. The efficient scale of production is where average total cost is minimized. In this case, it's $8, and the firm is producing at this level. Therefore, the current output of the firm (100 units) is the efficient scale of production.
3. Suppose the book-printing industry is competitive and begins in a long-run equilibrium.
a. In a competitive industry in the long-run equilibrium, the price equals both average total cost (ATC) and marginal cost (MC) for each firm. All firms produce at the minimum point of their ATC curve, where ATC = MC = price (which is also equal to marginal revenue in a competitive market).
b. When Better Publishers invents the new cost-reducing technology, their costs decrease. In the short-run, they will have higher profits due to lower costs. The price of books remains the same because other firms cannot use the new technology. Better Publishers' profits increase.
c. In the long-run, when the patent expires, other firms can adopt the new technology. This increased supply lowers the price of books in the market, and all firms will end up with normal profits as they compete.
4. On one side, a pharmaceutical firm that produces a specialized brand of painkillers advertises their product, and as a result, it has a good amount of customers that are loyal to their brand. On the other side, firms producing generic painkillers have no advertisement, and consumers buy their product only because it's low priced. Suppose both these firms have similar and constant marginal costs.
a. In this scenario, the demand curve for the branded painkillers firm would be more elastic due to competition from generic painkillers, whereas the demand for generic painkillers would be less elastic due to their low price.
Branded Painkillers Firm:
- Demand and Average Revenue are more elastic due to competition.
- Marginal Revenue and Marginal Cost are constant.
- The level of production is where MR = MC, and the margin over marginal cost indicates the firm's profit per unit sold.
Generic Painkillers Firm:
- Demand and Average Revenue are less elastic due to lower price and lack of advertising.
- Marginal Revenue and Marginal Cost are constant.
- The level of production is where MR = MC, and the margin over marginal cost indicates the firm's profit per unit sold.
b. The major difference between these firms is their brand loyalty and the elasticity of their demand curves. The branded painkillers firm likely has a higher margin due to its higher price, despite higher advertising costs. The firm with the greatest margin would be the branded painkillers firm because it can charge a higher price for its product due to brand loyalty, which translates into a larger profit margin per unit sold.
c. The branded painkillers firm has the major incentive to exercise stringent quality control over their production. Since they have brand loyalty and customers are willing to pay a higher price, any compromise in quality could harm their reputation and lead to a loss of customers. Generic painkillers firms, on the other hand, rely on price competitiveness rather than brand loyalty and may not face the same level of scrutiny regarding quality control.
5. Thirty years ago, the market for chicken meat was perfectly competitive. Afterwards, an innovative entrepreneur started to advertise his brand of chicken meat.
a. The innovative entrepreneur likely created a specialized brand of chicken meat through unique marketing, packaging, taste, or production methods that set their product apart from the generic chicken meat available in the market. From this specialization, the entrepreneur gained brand recognition, customer loyalty, and potentially the ability to charge a higher price for their specialized product, leading to increased profits.
b. Society gains from having a specialized brand of chicken meat in several ways:
- Diversity of Choice: Consumers have the option to choose between generic chicken meat and the specialized brand, providing variety in the market.
- Quality Assurance: Specialized brands often maintain consistent quality standards to preserve their reputation, ensuring consumers receive a reliable product.
- Innovation: The entrepreneur's innovations might lead to advancements in farming, processing, or packaging methods, benefiting the industry as a whole.
- Economic Growth: The success of the specialized brand can lead to job creation, economic growth, and increased investments in the local economy.
Overall, the specialized brand adds diversity, quality, and innovation to the market, benefiting both consumers and the broader economy.
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