Fall 2001
Practice
Questions #6
a Sohu’s current output level is efficient because average cost is minimized.
b Society would be better off if Sohu increased its current output level becauseprice exceeds marginal cost.
c.Society would be better off if Sohu increased its current output level because price exceeds average cost.
d.Society
would be better off if Sohu decreased its current output level because
this will increase the firm’s profits.
P=MR=AR
|
AC
|
AVC
|
AFC
|
5
|
4.5
|
4
|
0.5
|
4
|
4
|
3.3
|
y
|
3
|
4.2
|
2.5
|
1.7
|
2
|
X
|
2
|
2.5
|
1
|
5.5
|
2.5
|
3
|
(a)According to the relationship among AC, AVC and AFC, how much is x and y?
(b)When Miaojie gets zero profit, then what is the price of his product?
(c)What is his shutdown price?
(d)Why
he will continue to produce when P< AC and P>AVC?
8.Given the profit-maximizing output level,
a firm will seek to minimize costs. The connection between utility maximization
and profit maximization is less evident. This example lets you work through
the link between the maximizing behavior of households and of the firms.
(a). What, in words, is the utility maximizing rule?
(b) With two goods, X and Y, what is the utility-maximizing formula?
(c) What, in words, is the profit-maximization rule?
(d) Write down an explanation of the meaning of MC
(e) Now, write down the profit-maximizing formula. Does it hold for all profit maximizers?
(f)Let’s generalize by noting that Px= MCx and Py=MCy in a world of perfect competition where good X and good Y are produced.
Observe that the two results combined give: MU x / MU y = MC x / MC y. The perfectly competitive model results in the production of exactly those quantities of each of the goods requested by consumer, given their opportunity costs.
Now, let’s violate the equalities in this formula to check understanding. Suppose now: MU x =100, MC x=80 and MU y =120, MC y= 60. Substitute these values into the formula. What does this mean?
(g)
What should be the response?
(h)
What will happen to each of the four values?