GT00703 SEM 1 2016/2017

TUTORIAL 8

Answer all questions.

1. Explain and illustrate graphically how the growing world population is influencing the
world market for wheat and a representative individual wheat farmer.

2.

Use the figure above to answer the following questions.

a) How can you determine that the figure represents a graph of a perfectly competitive
firm? Be specific; indicate which curve gives you the information and how you use this
information to arrive at your conclusion.
b) What is the market price?
c) What is the profit-maximizing output?
d) What is total revenue at the profit-maximizing output?
e) What is the total cost at the profit-maximizing output?
f) What is the profit or loss at the profit-maximizing output?
g) What is the firm's total fixed cost?
h) What is the total variable cost?
i) Identify the firm's short-run supply curve.
j) Is the industry in a long-run equilibrium?
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k) If it is not in long-run equilibrium, what will happen in this industry to restore long-run
equilibrium?
l) In long-run equilibrium, what is the firm's profit maximizing quantity?

3. Use Figure 14.5, which shows the situation facing

Mikes Bikes, a producer of mountain bikes, to
answer (a) and (b). The demand and costs of other
mountain bike producers are similar to those of
Mikes Bikes.

a) What quantity does the firm produce and

what is its price? Calculate the firms
economic profit or economic loss.
b) What will happen to the number of firms
producing mountain bikes in the long run?

4. Bianca bakes delicious cookies. Her total fixed cost is $40 a day, and her average variable
cost is $1 a bag. Few people know about Biancas Cookies, and she is maximizing her profit
by selling 10 bags a day for $5 a bag. Bianca thinks that if she spends $50 a day on advertising,
she can increase her market share and sell 25 bags a day for $5 a bag.

a) If Biancas advertising works as she expects, can she increase her economic
profit by advertising?
b) If Bianca advertises, will her average total cost increase or decrease at the
quantity produced?
c) If Bianca advertises, will she continue to sell her cookies for $5 a bag or will
she change her price?

5. Refer to figure above to answer the following questions.

a) What quantity will this monopoly produce and what price will it charge?
b) Suppose the monopoly is regulated. If the regulatory agency wants to achieve economic
efficiency, what price should it require the monopoly to charge?
c) To achieve economic efficiency, what quantity will the regulated monopoly produce?
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d) Will the regulated monopoly make a profit if it charges the price that will achieve
economic efficiency?
e) Suppose the government decides to regulate the monopoly by imposing a price ceiling
of $35. What quantity will the monopoly produce and what price will the monopoly
charge?
f) With the price ceiling of $35, what profit will the monopoly earn?

6. Sleek Sneakers Co. is one of many firms in the market for shoes.

a) Assume that Sleek is currently earning short run economic profits. On a correctly
labeled diagram, show Sleeks profit maximizing output and price, as well as the area
representing profit.
b) What happens to Sleeks price, output and profit in the long run? Explain this change
and show it on a new diagram.
c) Suppose over time consumers become more focused on stylistic differences among
shoe brands. How would this change in attitudes affect each firms price elasticity of
demand? In the long run, how will this change in demand affect Sleeks price, output
and profits?