Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 9.A, Problem 3P
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Derive theoretically and graphically the supply curve of an industry.
Consider the perfectly competitive spice market. At the equilibrium price, the elasticity of market
supply is 1.45 and the elasticity of demand is 0.67.
Spice is a normal good.
An increase in incomes cause the market PRICE of spices to rise by 4%. What is the percentage
change in market QUANTITY?
Notes: Enter a number only, do not include the % sign. If it decreases, include a negative sign
before your number. For example, if it is a 15.675% decrease, enter -15.68 not -0.15. If quantity
decreases include a negative sign.
Suppose that over the short run (say the next 5 years), demand for OPEC oil is given by
P = 165 – 2.5q. Here q is measured in millions of barrels a day. OPEC marginal cost per barrel is $15.
What is OPEC’s optimal level of production? What is the prevailing price of oil at that level?
Many experts contend that maximizing short-run profit is counterproductive for OPEC in the long run because high price reduces buyers to conserve energy and spur competition and new exploration that increases the overall supply of oil. Suppose that the demand curve just described will remain unchanged only if oil prices stabilize at $65 per barrel or below. If oil price exceeds this threshold, long run demand (over a second five year-period) will be curtailed to P = 135 – 2.5q. OPEC seeks to maximize its total profit over the next decade. What is the optimum output and price policy? (assume all values are present values)
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- The short-run market demand and supply for Kente cloth are expressed as follows: Demand:P=40-0.25Q Supply: P=5+0.05Q Marginal cost: -20+4Q Find short run level of output.arrow_forwardThe agricultural market whose demand and supply schedules are is initially in long-run equilibrium. Quantity then falls to 50% of its previous level as a result of an unexpectedly poor harvest. How many time periods will it take for price to return to within 1% of its long-run equilibrium level?arrow_forwardA 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. What is its profit? What is its marginal cost? What is its average variable cost?arrow_forward
- An increasing-cost industry is associated with Multiple Choice a perfectly elastic long-run supply curve. an upsloping long-run supply curve. a perfectly inelastic long-run supply curve. an upsloping long-run demand curve.arrow_forwardSuppose that the seitan industry is initially operating in long-run equilibrium at a price level of $5 per pound of seitan and quantity of 175 million pounds per year. Suppose a top medical journal publishes research that animal-alternative protein sources such as seitan could increase your expected lifespan by 5 years. The publication is expected to cause consumers to demand (less/more) seitan at every price. In the short run, firms will respond by ( attached image). Shift the demand curve, the supply curve, or both on the following graph to illustrate these short-run effects of the publication In the long run, some firms will respond by (attached image) until (consumer demand returns to original level, each firm in the industry is once again earning zero profit, seitan populations grow large enough to support more firms, new technologies are discovered that lower costs) Now Shift the demand curve, the supply curve, or both on another graph (same as the first) to illustrate both…arrow_forwarda) A profit-maximizing business incurs an economic loss of $10,000 per year. Its fixed cost is $15,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or exit in the long run? b) Suppose instead that this business has a fixed cost of $6,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or exit in the long run?arrow_forward
- Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC) and that the market price is expected to rise at least to ATC in the near future. In the short run, a firm that is a price-taker would immediately shut down and get out of the industry. continue to produce a quantity such that marginal revenue equals marginal cost. shut down temporarily, in hopes of restarting in the near future. cut price and expand output in hopes of achieving economies of scale. None of the above.arrow_forwardQuestion: Derive theoretically and graphically the supply curve of an industry.arrow_forward(a) Let the industry producing soybeans be in a long-run equilibrium. What is the equilibrium price of a bushel of soybeans? How many billions of bushels are produced? How many farmers are there in the industry? What is the shipping fee per bushel of soybeans? (b) Suppose that the demand for soybeans drops due to decreased im- port by China and becomes Q = 15.3 − p. In a new long run equilibrium, what is the equilibrium price of a bushel of soybeans? How many billions of bushels are produced? How many farmers are there in the industry? What is the shipping fee per bushel? (c) Calculate the change in the producers’ surplus between the situations described in (a) and (b). (d) Show that the decrease in the producers’ surplus equals to the decrease in the total shipping fees as the industry contracts incrementally from the equilibrium output in (a) to the equilibrium output in (b).arrow_forward
- A bakery that produces 100 loaves of bread has a variable cost of $50 and a fixed cost of $200. Calculate the total cost, average total cost, average variable cost, and average fixed cost of the bakery. 50 units of an output is supplied when the price is OMR 10. When price increases to OMR 20, the units of output supplied will be 80. Calculate elasticity of supply and comment on its elasticity.arrow_forwardConsider the perfectly competitive spice market. At the equilibrium price, the elasticity of market supply is 0.31 and the elasticity of demand is 1.93. An increase in production costs cause the market PRICE of spices to rise by 2%. What is the percentage change in market QUANTITY? Notes: Enter a number only, do not include the % sign. If it decreases, include a negative sign before your number. For example, if it is a 15.675% decrease, enter -15.68 not -0.15. If quantity decreases include a negative sign.arrow_forwardThe following graph plots the market demand curve for rhenium. Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 20 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 30 firms. PRICE (Dollars per pound) 80 72 64 56 48 40 32 24 16 8 0 Demand 0 120 240 360 480 600 720 840 960 1080 1200 QUANTITY (Thousands of pounds) Because you know that competitive firms earn Supply (10 firms) Supply (20 firms) True 4 If there were 30 firms in this market, the short-run equilibrium price of rhenium would be s would Therefore, in the long run, firms would O False Supply (30 firms) per pound. From the graph, you can…arrow_forward
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