Microeconomic Industry Analysis Task

ECON 620: Microeconomic Industry Analysis

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Fall 2014

Question

Max Points

Earned Points

Q1

10

Q2

10

Q3

10

Q4

10

Q5

10

Q6

10

Q7

10

Q8

10

Q9

10

Q10

10

Entire Marks

100

  1. Net income versus Revenue Maximization

A.Determine these profit-maximising and revenue-maximizing price/output combinations analytically.

Unit of measurements

Monetary value

Entire Gross

Fringy Gross

Entire Cost

Fringy Cost

Entire Net income

Fringy Net income

0

60

0

60

100000

5

-100000

55

1000

55

55000

50

105000

6

-50500

44

2000

50

100000

40

112000

7

-12000

33

3000

45

135000

30

119500

8

15500

22

4000

40

160000

20

128000

9

32000

11

5000

35

175000

10

137500

10

37500

0

6000

30

180000

0

148000

11

32000

-11

7000

25

175000

-10

159500

12

15500

-22

8000

20

160000

-20

172000

13

-12000

-33

9000

15

135000

-30

185500

14

-50500

-44

10000

10

100000

-40

200000

15

-100000

-55

To happen the profit-maximising end product degree analytically, set MR = MC, or put M? = 0, and work out for Q. Because

MR = MC

$ 60 – $ 0.01Q = $ 5 + $ 0.001Q

0.011Q = 55

Q = 5,000

At Q = 5,000,

P = $ 60 – $ 0.005 ( 5,000 )

= $ 35

? = – $ 100,000 + $ 55 ( 5,000 ) – $ 0.0055 ( 5,000 ) ?

= $ 37,500

( Note: M? ?/MQ? & A ; lt ; 0, This is a net income upper limit because entire net income is falling for Q & A ; gt ; 5,000. )

To happen the revenue-maximizing end product degree, set MR = 0, and work out for Q. Thus,

MR = $ 60 – $ 0.01Q = 0

0.01Q = 60

Q = 6,000

At Q = 6,000,

P = $ 60 – $ 0.005 ( 6,000 )

= $ 30

? = TR – Technetium

= ( $ 60 – $ 0.005Q ) Q – $ 100,000 – $ 5Q – $ 0.0005Q?

= – $ 100,000 + $ 55Q – $ 0.0055Q?

= – $ 100,000 + $ 55 ( 6,000 ) – $ 0.0055 ( 6,000 ) ?

= $ 32,000

( Note: M2 TR/MQ2 & A ; lt ; 0 and this is a gross upper limit because entire gross is diminishing for end product beyond Q & A ; gt ; 6,000. )

B.Given downward inclining demand and fringy gross curves and positive marginal costs, the profit-maximising price/output combination is ever at a higher monetary value and lower production degree than the revenue-maximizing price-output combination. This stems from the fact that net income is maximized when MR = MC, whereas gross is maximized when MR = 0. It follows that net incomes and gross are merely maximized at the same price/output combination in the improbable event that MC = 0. In prosecuting a short-term gross instead than profit-maximising scheme, Presto can anticipate to derive a figure of of import advantages, including enhanced merchandise consciousness among consumers, increased client trueness, possible economic systems of graduated table in selling and publicity, and possible restrictions in rival entry and growing. To be consistent with long-term net income maximization, these advantages of short-term gross maximization must be at least deserving Presto ‘s short-term forfeit of $ 5,500 ( = $ 37,500 – $ 32,000 ) in monthly net incomes

  1. Demand and Supply Curves.

A.Calculate the equilibrium price/output combination

The equilibrium price/output relation is found by puting QCalciferol= QSecondand work outing for P and Q: QCalciferol= QSecond

500,000 – 50,000P = -100,000 + 100,000P

150,000P = 600,000

P = $ 4

Then, QD = QS

500,000 – 50,000 ( $ 4 ) = -100,000 + 100,000 ( $ 4 )

300,000 = 300,000

B.Calculate the surplus/shortage if the monetary value peers $ 2

If P= $ 2

Then,

QCalciferol= 500,000 – 50,000P

= 500,000 – 50,000 ( 2 )

= 500,000 – 100,000

= 400,000

QSecond= -100,000 + 100,000P

= -100,000 + 100,000 ( 2 )

= -100,000 + 200,000

= 100,000

The measure demanded is more than measure supplied, therefore making a deficit.

  1. Calculate the surplus/shortage if the monetary value peers $ 5

If P= $ 5

Then,

QCalciferol= 500,000 – 50,000P

= 500,000 – 50,000 ( 5 )

= 500,000 – 250,000

= 250,000

QSecond= -100,000 + 100,000P

= -100,000 + 100,000 ( 5 )

= -100,000 + 500,000

= 400,000

The measure supplied is more than measure demanded, therefore making a excess.

  1. Demand Function.The Creative Publishing Company ( CPC ) is a voucher book publishing house with markets in several emirates. CPC voucher books are sold straight to the populace. Operating experience during the past twelvemonth suggests the undermentioned demand map for CPC’s voucher books:

Q = 5,000 – 4,000P + 0.02Pop + 0.25I + 1.5A,

where Q is measure, P is monetary value ( $ ) , Pop is population, I is disposable income per family ( $ ) , and A is publicizing outgos ( $ ) .

  1. Determine the demand faced by CPC in a typical market in which P = $ 10, Pop = 1,000,000 individuals, I = $ 60,000, and A = $ 10,000.

Q = 5,000 – 4,000P + 0.02Pop + 0.25I + 1.5A,

Q = 5,000 – 4,000 ( 10 ) + 0.02 ( 1,000,000 ) + 0.25 ( 60,000 ) + 1.5 ( 10,000 )

= 5,000 – 40,000 + 20,000 + 15,000 + 15,000

= 15,000

  1. Calculate the degree of demand if CPC increases one-year advertisement outgos from $ 10,000 to $ 15,000.

Q = 5,000 – 4,000 ( 10 ) + 0.02 ( 1,000,000 ) + 0.25 ( 60,000 ) + 1.5 ( 15,000 )

= 5,000 – 40,000 + 20,000 + 15,000 + 22,500

= 22,500

C.Calculate the demand curves faced by CPC in parts A and B.

  1. Elasticity.
  1. A monetary value decrease for personal computing machines will increase both the figure of units demanded and the entire gross of Sellerss.

Answer.True. A monetary value decrease ever increases units sold, given a downward sloping demand curve. The negative mark on the monetary value snap indicates that this is so the instance here. The fact that monetary value snap peers -5 indicates that demand is elastic with regard to monetary value, and that a monetary value decrease will increase entire grosss.

  1. The cross-price snap indicates that a 5 % decrease in the monetary value of personal computing machines will do a 20 % addition in package demand.

Answer.False. The cross-price snap indicates that a 5 % lessening in the monetary value of package plans will hold the consequence of increasing personal computing machine demand by 20 % .

  1. Demand for personal computing machines is monetary value elastic and computing machines are cyclical normal goods.

Answer.True. Demand is monetary value elastic ( see portion A ) . Since the income snap is positive, personal computing machines are a normal good. Furthermore, since the income snap is greater than one, personal computing machine demand is besides cyclical.

  1. Falling package monetary values will increase grosss received by Sellerss of both computing machines and package.

Answer.False. Negative cross-price snap indicates that personal computing machines and package are regards. Therefore, falling package monetary values will increase the demand for computing machines and ensuing grosss for Sellerss. However, there is no information refering the monetary value snap of demand for package, and hence, one does non cognize the consequence of falling package monetary values on package grosss.

  1. Optimal Input Usage.

A.Does Medical Testing Lab use reflect an optimum mix of proving equipment?

On a per hr footing, the relevant inquiry is

27/ $ 18,000/ ( 25 x 8 ) = 48/ $ 32,000/ ( 25 x 8 )

0.3 = 0.3

On a per month footing, the relevant inquiry is

27 ten ( 25 x 8 ) / $ 18,000 = 48 x ( 25 x 8 ) / $ 32,000

0.3 = 0.3

In both cases, the last dollar spent on each machine, increased end product by the same 0.3 units, bespeaking an optimum mix of proving machines.

B.If trials are conducted at a monetary value of $ 6 each piece labour and all other costs are fixed, should the company lease more machines?

For each machine hr, the relevant inquiry is

Testlogic-1

MRPT = MPT ? MRQ = PT

27 ? $ 6 = $ 18,000/ ( 25 ? 8 )

$ 162 & A ; gt ; $ 90

Accutest-3

MRPA = MPA ? MRQ = PA

48 ? $ 6 = $ 32,000/ ( 25 ? 8 )

$ 288 & A ; gt ; $ 160

Or, in per month footings:

Testlogic-1

MRPT = MPT ? MRQ = PT

27 ? ( 25 ? 8 ) ? $ 6 = $ 18,000

$ 32,400 & A ; gt ; $ 18,000

Accutest-3

MRPA = MPA ? MRQ = PA

48 ? ( 25 ? 8 ) ? $ 6 = $ 32,000

$ 57,600 & A ; gt ; $ 32,000

In both instances, each machine returns more than its fringy cost ( monetary value ) of employment, and enlargement would be profitable.

  1. Fringy Revenue Product of Labor.

A.Estimate Jones= one-year ( 50 workweek ) fringy gross merchandise.

In the long tally, Jones marginal gross merchandise is the maximal sum Smart Motors could pay in base salary plus all periphery benefits.It is the sum of added gross after all other variablecosts that Jones attempt bringsto thefirm.In this instance, Jones marginal gross merchandise is determined by thenumber of autos sold and the net income part earned on each sale

MRPL = MPL ? MRQ

= ( Car gross revenues per twelvemonth ) ? ( Profit part per unit )

= ( 1.5 ?50 ) ? ( $ 1,000 )

= $ 75,000

Because Jones is merely engaged in the gross revenues map, Jones does non bring forth autos. What Jones does bring forth are carsales, and the benefit to the employer of Jones gross revenues attempt is what determines the sum the employer is willing and able topay.

B.Jones earns a basal wage of $ 60,000 per twelvemonth, and Smart Motors pays an extra 28 % of this base wage in revenue enhancements and assorted periphery benefits. Is Jones a profitable employee?

No.In add-on to establish salary, employers must pay extra revenue enhancements and fringebenefits.All of these costs mustbe justified by the sum of fringy revenueproduct generated to warrant employment.In this instance, employment costsfor Jones are $ 76,800 ( = $ 60,000 ?1.28 ) .A comparing of fringy gross merchandise figures with these employment cost datasuggests:

MRPL = $ 75,000 & A ; lt ; $ 76,800 =PL

Therefore, Jones brings in $ 75,000 per yearin extra net income part, but costs Smart Motors $ 76,800.This agencies that Jones brings in $ 1,800 per twelvemonth less in net marginal grosss than the fringy cost ofemployment.At the border, Jones’s employment represents a fringy loss to Smart Motors.Jones is non a profitable employee.

  1. Minimum Efficient Scale Estimation.

A.Estimate minimal efficient graduated table in this industry.

Minimum efficient graduated table is reached when mean costs are first minimized. This occurs at the point where MC = AC.

Average Costss = AC = TC/Q

= ( $ 3,000 + $ 1,000Q + $ 0.003 Q? ) /Q

= $ 3,000/Q + $ 1,000 + $ 0.003Q

Therefore,

MC = AC

$ 1,000 + $ 0.006Q = $ 3,000/Q + $ 1,000 + $ 0.003Q

0.003Q = 3,000/Q

3,000/Q? = 0.003

Q? = 1,000,000

Q = 1,000 ( 000 ) or 1 million

( Note: Actinium is lifting for Q & A ; gt ; 1,000 ( 000 ) ) .

Alternatively, MES can be calculated utilizing the point cost snap expression, since MES is reached when ?C = 1.

?C =TC/Q ? Q/TC

( $ 1,000 + $ 0.006Q ) Q/ ( $ 3,000 + $ 1,000Q+ $ 0.003Q? ) = 1

1,000Q + 0.006Q? = 3,000 + 1,000Q + 0.003Q?

0.003Q? = 3,000

Q? = 1,000,000

QMES = 1,000 ( 000 ) or 1 million

B.In visible radiation of current PABX demand of 30 million units per twelvemonth, how would you measure the future potency for competition in the industry?

Potential Number of Efficient Competitors = Market Size/MES Size

= 30,000,000/1,000,000

= 30

Therefore, there is the possible for N = 30 expeditiously sized rivals and, hence, vigorous competition in Kanata ‘s industry

  1. Stable Competitive Equilibrium.

A.Calculate Bada Bing ‘s optimum end product and net incomes if bit monetary values are stable at $ 60 each.

Because the industry is absolutely competitory, P = MR = $ 60. Set MR = MC to happen the profit-maximising activity degree. From the entire cost-function note:

TC = $ 1,000,000 + $ 20Q + $ 0.0001Q?

MC = ?TC/?Q = $ 20 + $ 0.0002Q

Therefore,

MR = MC

$ 60 = $ 20 + $ 0.0002Q

0.0002Q = 40

Q = 200,000

? = TR – Technetium

= $ 60 ( 200,000 ) – $ 1,000,000 – $ 20 ( 200,000 ) – $ 0.0001 ( 200,000 ) ?

= $ 3,000,000

B.If Bada Bing is typical of houses in the industry, calculate the house ‘s long-term equilibrium end product, monetary value, and economic net income degrees.

In equilibrium, P = AC and MR = MC at the point where norm cost is minimized. To happen the point of minimal mean costs set MC = AC, and work out for Q:

MC = AC = TC/Q

$ 20 + $ 0.0002Q = ( $ 1,000,000 + $ 20Q + $ 0.0001Q? ) /Q

Q = 100,000

P = AC

= $ 40

? = TR – TC

= $ 40 ( 100,000 ) – $ 1,000,000 – $ 20 ( 100,000 ) – $ 0.0001 ( 100,000 ) ?

= $ 0

  1. Dynamic Competitive Equilibrium.Wal-Mart and other film DVD retail merchants, including on-line sellers like amazon.com, use a two-step pricing policy. During the first six months following a theatrical release, film DVD purchasers are willing to pay a premium for new releases. Entire and fringy gross dealingss for a typical freshly released film DVD are given by the undermentioned dealingss:

TR = $ 28Q – $ 0.0045Q2

MR = ?TC/?Q = $ 28 – $ 0.009Q

Entire cost ( TC ) and fringy costs ( MC ) for production and distribution are:

TC = $ 4,500+ $ 3Q + $ 0.0005Q2

MC = ?TC/?Q = $ 3 + $ 0.001Q

where Q is in 1000s of units ( DVDs ) . Because units are in 1000s, both entire grosss and entire costs are in thousand of dollars. Entire costs include a normal net income.

A.Use the fringy gross and fringy cost dealingss given above to cipher DVD end product, monetary value, and economic net incomes at the profit-maximising activity degree for new releases.

Set MR = MC to happen the profit-maximising activity degree:

MR=MC

$ 28- $ 0.009Q= $ 3+ $ 0.001Q

0.01Q=25

Q=2,500 ( 000 )

P = TR/Q

= ( $ 28Q- $ 0.0045Q? ) /Q

= $ 28 – $ 0.0045Q

= $ 28- $ 0.0045 ( 2,500 )

= $ 16.75

? = TR–TC

= $ 28Q- $ 0.0045Q? – $ 4,500 – $ 3Q- $ 0.0005Q?

= $ 25Q- $ 0.005Q? – $ 4,500

= $ 25 ( 2,500 ) – $ 0.005 ( 2,500 ) ? – $ 4,500

= $ 26,750 ( 000 )

B.After six months, price-sensitive DVD purchasers appear willing to pay no more than $ 6 per DVD. Calculate the equilibrium price-output activity degree in this state of affairs. Is this a stable equilibrium?

In a absolutely competitory industry, P = MR = MC in equilibrium.Thus, six months after the initial theatrical release, P = MC= $ 6 would result.Set P= MR =MC to happen the profit-maximising activity degree:

MR = MC

$ 6 = $ 3+ $ 0.001Q

0.001Q = 3

Q = 3,000 ( 000 )

? =TR–TC

= $ 6 ( 3,000 ) – $ 4,500 – $ 3 ( 3,000 ) – $ 0.0005 ( 3,000 ) ?

= $ 0 ( 000 )

Because merely normal net incomes are being made, this is a stable equilibrium in the market and there will be no inducement for entry or issue.

  1. Monopoly versus Competitive Market Equilibrium.

A.Calculate the profit-maximising price/output combination and economic net incomes if MicroChips enjoys an effectual monopoly because of patent protection.

The profit-maximising price/output combination is found by puting MR = MC. Because AVC is changeless, MC = AVC = $ 4,500. Therefore:

MR = MC

$ 5,500 – $ 0.01Q = $ 4,500

0.01Q = 1,000

Q = 100,000

P = $ 5,500 – $ 0.005 ( 100,000 )

= $ 5,000

Economic Net incomes = P Q – AVC Q

= $ 5,000 ( 100,000 ) – $ 4,500 ( 100,000 )

= $ 50,000,000

( Note: As a monopolizer, the company is the industry ) .

B.Calculate the price/output combination and entire economic net incomes that would ensue if rivals offer ringers that make the market absolutely competitory.

In a competitory market, P = MC. In this case, AVC is changeless and, hence, MC = AVC. Competitive market equilibrium occurs where:

P = MC = AVC

$ 5,500 – $ 0.005Q = $ 4,500

0.005Q = 1,000

Q = 200,000

P = $ 5,500 – $ 0.005 ( 200,000 )

= $ 4,500

Economic Net incomes = P Q – AVC Q

= $ 4,500 ( 200,000 ) – $ 4,500 ( 200,000 )

= $ 0

In words, the transmutation from monopoly to hone competition has brought a $ 1,000 decrease in monetary value and a 100,000-unit enlargement in end product. At the same clip, economic net incomes have been eliminated.

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