1) Use graphs to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are earning economic (excess) profits. Be sure to identify both the industry circumstances and the circumstances for a “typical firm”. Then show how the market responds to these excess profits in the long run, and what circumstances will prevail once new firms have a chance to enter the market. Explain this process briefly. You are free to use more space than what is provided below.
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2) The essence of “monopoly power” (which to some extent any firm that is not a perfect competitor can hold) is the ability of a firm to drive a wedge between the price it charges and the costs it pays. Perfect competition, of course, pushes price down to cost in the long run. Identify a line of business you are familiar with (preferably car industry, but any will work). Give an example of how firms in the business attempt to create and maintain the price/cost gap.
3) The following table (below) shows a portion of the demand schedule for a particular good at a single level of income.
Quantity Demanded
Price (Income = $50,000)
$24 2
$20 4
$16 6
$12 8
$8 10
$4 12
Refer to the table above.
a. Compute the price elasticity of demand between $24 and $20. Is demand price elastic or price inelastic over the interval? Interpret this number in a single sentence.
b. Compute the price elasticity of demand between $8 and $4. Is demand price elastic or price inelastic over the interval? Interpret this number in a single sentence.
c. Given your answers to questions a. and b. above, in which of these situations would a lower price generate more sales revenue for this market?
4) Use this table (below) to answer the following question:
Gallo Cork Factory
# workers # of machines Output (corks per day)
a.) 1 2 50
b.) 2 2 100
c.) 3 2 200
d.) 4 2 350
e.) 5 2 550
f.) 6 2 700
g.) 7 2 800
Cost per worker: $12 per hour (assume a 12-hour day)
Cost per machine: $20 per day
a. Complete the table
b. Describe briefly the relationship among the marginal product of labor, the marginal cost, and the average total cost, focusing on the “turning points”. Pay particular attention to the impact of rising marginal product of labor.
Answer will be sent by email as attachment.
