Supply and Demand and Total Profit
Question 6 Use Figure 6. 5 to determine: a) How many baskets of fish should be harvested at market prices of i. $9? The farmer should harvest 3 baskets in order to gain the maximum profit. ii. $13? The farmer should harvest 4 baskets in this case to maximize profits. iii. $17? The farmer should maximize profits by harvesting 5 baskets at $17. b) How much total revenue is collected at each price? Total revenue = price x quantity i. Total Revenue = $9 x 3 = $27 ii.
Total Revenue = $13 x 4 = $52 iii. Total Revenue = $17 x 5 = $85 c) How much profit does the farmer make at each of these prices? Total Profit = Total Revenue – Total Costs i. Total Profit = $27 – $31 = -$4 ii. Total Profit = $52 – $44 = $8 iii. Total Profit = $85 – $61 = $24 Q7: Suppose the typical catfish farmer was incurring an economic loss at the prevailing price p1. What forces would raise the price? Prices would be raised if other catfish farmers drop out of the market.
This will make the market supply shift to the left and therefore result in higher prices. What price would prevail in long-term equilibrium? The price that equals the level of minimum average total costs will be the prevailing price in the long-term equilibrium position. Illustrate your answers with separate graphs for the catfish market and typical farmer. Q8: Graph the market behavior described in the Headline on p. 131. The behavior described in the Headline on p. 131 is one in which numerous firms have entered the marketplace and driven the price of the product down.
The graph below illustrates what happens to the market supply curve as new firms enter the industry. The curve shifts to the right which illustrates a drop in price. Q6: Use Figure 6. 5 to determine How many baskets of fish should be harvested at market prices of $9? In order to maximize the profits, or in this instance minimize losses, the farmer should harvest 3 baskets. This ensures a loss of $4. $13? In order to maximize profits, the farmer should harvest 4 baskets. This is the point in which p=MC and results in maximum profits of $8. 17? In order to maximize profits, the farmer should harvest 5 baskets. This is the point in which p=MC and results in maximum profits of $24. How much total revenue is collected at each price? Total revenue = price x quantity Total Revenue = $9 x 3 = $27 Total Revenue = $13 x 4 = $52 Total Revenue = $17 x 5 = $85 How much profit does the farmer make at each of these prices? Total Profit = Total Revenue – Total Costs Total Profit = $27 – $31 = -$4 Total Profit = $52 – $44 = $8 Total Profit = $85 – $61 = $24
Q7: Suppose the typical catfish farmer was incurring an economic loss at the prevailing price p1. What forces would raise the price? What price would prevail in long-term equilibrium? Illustrate your answers with separate graphs for the catfish market and typical farmer. In a perfectly competitive market such as catfish farming, the price would only be raised when producers exit the industry for better profits elsewhere. As an industry begins to operate at a loss, the producers tend to exit which provides less supply and drives the prices back up.
This is illustrated in the graph below which shows a shift of the supply curve from right to left. The curve for the typical farmer will be the same except with lower quantities. The long-term equilibrium would result in a price that was equal to the minimum average total cost and economic profit is eliminated. That is illustrated by the graph below which shows the price (p2) equal to the minimum average total cost (ATC). The graph for the typical catfish farmer will be the same except with lower quantities. Q8: Graph the market behavior described in the Headline on p. 31. The behavior described in the Headline on p. 131 is one in which numerous firms have entered the marketplace and driven the price of the product down. The graph below illustrates what happens to the market supply curve as new firms enter the industry. The curve shifts to the right which illustrates a drop in price. Q9: (a) A book salesman declares, “When the unit price is $5, I can sell 100 books; when the unit price is $6, I can only sell 90 books. ” Given the information, please determine whether the demand on book is elastic or not. (5%)
Elasticity (E) = percentage change in quantity demanded (Qd)/ percentage change in price (Pc) E = Qd/ Pc E = -10%/ 20% = -0. 5 Because the elasticity is less than one, the demand on the book is inelastic. (b) The same book salesman learned the price elasticity of demand on a particular book is ? 2. If the salesman cuts the price by 10%, how many percent will increase on the total sales (revenue)? (5%) E = -2 = Qd/ Pc Pc = -10% -2 = Qd/ -10% -10% * -2 = Qd = 20% The salesman should expect a 20% increase in total sales. Q10: Mr. Rich still has money in pocket to spend.
If only two products are available to him, avocado (A) and broccoli (B), the current marginal utility (MU) and price per pound (P) are as the following: MUA=8, MUB=4, PA=$10, PB=$6. In order to maximize his total utility, Mr. Rich should consume more avocados or broccolis? (10%) Assuming that Mr. Rich can afford either of the products, at the current rates of marginal utility Mr. Rich should consume the avocado to maximize his total utility. The avocado has a higher marginal utility which means that it will have a larger increase on Mr. Rich’s total utility.
