Exercise 6.2.1 A certain monopoly firm has a marginal cost that depends on the quantity produced. The marginal cost is MC =2*Q. You are also given a few values regarding the firm's average total cost, ATC, at different quantities: ATC 2 20 5 12.5 7 12 10 13 12 15 15 18 20 23 25 27 As a direct consequence of the shape of the demand curve, the marginal revenue curve becomes MR = 30 2*Q. a) Construct a graph with quantity on the X-axis and your currency of choice on the Y-axis. Draw the MC-, MR-, ATC- and demand curves in the graph. b) Why is the MR curve steeper than the demand curve? c) How large quantities will the firm produce if it maximizes its profit? d) Which price will they charge? e) Calculate the profit. () Indicate the producer- and consumer surpluses in the graph.Exercise 5.1.1 a) What does "perfect competition" mean? State a few of the underlying assumptions. b) Explain in words why the demand curve a firm faces in a perfectly competitive market is horizontal. c) For an individual firm in a perfectly competitive market, the marginal revenue, MR, is equal to the price, p. Why is that? 5.2 The Firm's Short-Run Profit Maximization Exercise 5.2.1 We will now study the choice of which quantity to produce for an individual firm in the short run. Draw a graph with produced quantity on the X-axis and cost/revenue (i.e. amount of the currency of your choice) on the Y-axis. a) You are given data over total cost, TC, at different quantities produced. Draw the corresponding TC curve. TC 0 20 60 40 80 60 100 80 130 100 240 b) For a firm in a perfectly competitive market, the total revenue curve, TR, is unusually easy to draw. What will it look like? Draw TR in your figure. Remember that if you sell nothing, your revenue is zero. The price of the good is 2.20. Download free books at BookBook.com 18 Microeconomics Exercises with Suggested Solutions Perfect Competition c) Below the graph, construct another graph with the same scale on the X-axis. First, draw the curve for average variable cost, AVC. Be careful to get the minimum point in the right place. How can you know at which quantity AVC reaches its lowest point? Then, draw the marginal cost curve, MC. At least one point is easy to find. Which one? Where will the MC curve be above the AVC curve and where will it be below it? Lastly, draw the marginal revenue curve, MR. d) Show how to find the point where the firm maximizes its profit. Where is that in the graph? e) The profit can be found in two different ways. Show both of them. Approximately, how large is the profit. () How can one find the firm's short-run supply curve from the graph? Indicate it in the graph. g) Can you find the firm's long-run supply curve in the graph?4. AS: Aggregate supply a. (1 points) Denote the number of people who would like to work by L, and the number of people who are employed by N. Write down the definition of the unemployment rate and call it 4.a b. (1 point) Assume that the wage setting equation is given by: W/P =10-u What is the natural rate of unemployment implied by this equation? (1 point) Replace your definition of the unemployment rate from part a. Call your new equation 4.c. d. (1 point) Assume that the price setting equation is given by P=2W. How big is the mark-up implied by this equation? e. (1 point) Assume L=100 and use the price setting equation to eliminate W in equation 4.c. Interpret., and call your new equation 4.e. f. (1 point) Assume that the production technology is Y=N. What happens to the curve when expected prices shift? Explain g. (1 point) What does this curve represent? h. (1 point) Draw the curve in (P, Y).3. AD: The aggregate demand curve a. (2points) The IS-LM curves give you the equilibrium on the money and goods market. Assume T=0. By combining IS and LM from questions 1. and 2., eliminate the interest rate. Solve your equation for P. This is the AD curve. b. (2points) What does this curve represent? c. (2points) Your AD curve from 3 a) depends on P, G and M. Draw the curve in space (P, Y). What happens when M increases? Explain. What happens to the AD curve when G increases? Explain
