Question 1 The farmer is not maximizing his profit because marginal revenue (Price = 22 cents) is not equal to marginal cost (MC =30 cents) of producing sugar at the given level. Since marginal cost increases by increasing the quantity produced, the farmer should producer lesser than 100,000 pounds and decrease the sugar production up to the level where marginal cost cuts back to equal the price i.e…
But since increase in quantity produced raises marginal cost, producer of butter would raise its price to keep up with the increased marginal cost (to maximize profit). Thus, price begins to rise. Now, if the demand for butter drops, producer would cut their production and thus the marginal cost again decreases and they can lessen the price too because now the profit maximizing condition (MR = MC) can be satisfied at the lower price. Question 3 In a perfectly competitive industry, economic profits disappear in the long run because entry and exit of a firm is free of barriers which allows the number of firms to remain up to the level of zero economic profits as opposed to an imperfectly completive industry where entry barriers prevent other firms from entering the industry and thus from exhausting the profits. For a perfectly competitive industry, economic profit attracts the new suppliers in the market as they can freely enter. New entries is continued until ATC = price. This is because if ATC > price (positive profit), more firms will enter and thus absorb the profit and if ATC < price, firms will shut down in long run (as exit is also free in perfect competition) to avoid the economic loss and thus price and ATC again becomes equal – zero economic profit. Question 4 Suppose the firm is a profit-maximizing firm. ...
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Therefore, eliminating taxes would prevent the government from reaching its desired revenue targets and this would result in a deficit between what the government spends and what it collects. Ans 2) A private good is one that is excludable in nature and is unique for every consumer.
However, when the price of a gallon of paint increased to $3.50, his usage decreased to 20 gallons. The exercise aims to introduce the concept of elasticity by illustrating how the demand for a product will decrease if the price is increased. In the example, one observes that the demand for paint is elastic because it is sensitive to price changes.
There can be two possible explanations of this rise and fall in the prices of the butter. First could be the direct result of the changes in the supply and demand of butter in the market. If supply of butter in the market is decreasing, its prices will start
b.) Suppose that the prevailing price is $400. Would you recommend an increase in the price to $500, why or why not? Explain using the concept of elasticity. If not, describe the conditions under which you could make such a recommendation.
Given the price
Similarly if he spends his entire budget on food then he will be able to consume 0 unit of water and 4 unit of food. The table below shows that how the consumer is able to allocate his budget on food and water.
us, as beef price increases and since the customers are price sensitive, the demand will decrease as the consumers will resort to consuming chicken since they lower priced. The consumers will thus reduce consumption of beef and increase consumption of chicken.
The supply of
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