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CRC Economics 1
CRC Economics 2
ExercisesEcon 304
Chapter 13
CRC Economics 3
Do you know …
how to calculate different types of profits?
how to calculate and graph different revenue curves?
how to calculate and graph different product curves?
how to calculate and graph different cost curves?
how to calculate the profit-maximizing output level?
CRC Economics 4
1. How to calculate profits? Given the information below about a
firm:
Answer the questions that follow.
Q =P =
=====
r =
$25,000$150,000$400,000
Market rate of interest
Output (units)Price per unit
$100,000$300,000
$70,00010%
10
Costs of raw materialsValue of investment
Salary (if working for others)
Using own moneyUsing borrowed money
CRC Economics 5
Questions to answerQ =P =
=====
r =
$25,000$150,000$400,000
Market rate of interest
Output (units)Price per unit
$100,000$300,000
$70,00010%
10
Costs of raw materialsValue of investment
Salary (if working for others)
Using own moneyUsing borrowed money
How much is total revenue (TR)?
Formula: TR = P x Q
TR = $25,000 x 10 = $250,000
CRC Economics 6
Questions to answerQ =P =
=====
r =
$25,000$150,000$400,000
Market rate of interest
Output (units)Price per unit
$100,000$300,000
$70,00010%
10
Costs of raw materialsValue of investment
Salary (if working for others)
Using own moneyUsing borrowed money
How much are explicit costs?
Hint: Explicit costs = costs that require money outlay
Explicit costs = Costs of raw materials + Interest costs of borrowed money
Explicit costs = $150,000 + ($300,000x10%) = $180,000
CRC Economics 7
Questions to answerQ =P =
=====
r =
$25,000$150,000$400,000
Market rate of interest
Output (units)Price per unit
$100,000$300,000
$70,00010%
10
Costs of raw materialsValue of investment
Salary (if working for others)
Using own moneyUsing borrowed money
How much are implicit (opportunity) costs?
Hint: Implicit costs = costs that do NOT require money outlay
Implicit costs = Foregone salary + + Foregone interests on own money
Implicit costs = $70,000 + ($100,000x10%) = $80,000
CRC Economics 8
Questions to answerQ =P =
=====
r =
$25,000$150,000$400,000
Market rate of interest
Output (units)Price per unit
$100,000$300,000
$70,00010%
10
Costs of raw materialsValue of investment
Salary (if working for others)
Using own moneyUsing borrowed money
How much are total costs (TC)?
Formula: Total costs = Explicit costs + Implicit costs
TC = $180,000 + $80,000 = $260,000
CRC Economics 9
Questions to answerQ =P =
=====
r =
$25,000$150,000$400,000
Market rate of interest
Output (units)Price per unit
$100,000$300,000
$70,00010%
10
Costs of raw materialsValue of investment
Salary (if working for others)
Using own moneyUsing borrowed money
How much is accounting profit?
Formula: Accounting profit = Total revenue – Explicit costs
Accounting profit = $250,000 - $180,000 = $70,000
CRC Economics 10
Questions to answerQ =P =
=====
r =
$25,000$150,000$400,000
Market rate of interest
Output (units)Price per unit
$100,000$300,000
$70,00010%
10
Costs of raw materialsValue of investment
Salary (if working for others)
Using own moneyUsing borrowed money
How much is economic profit ()?
Formula: Economic profit = Total revenue – Total costs
Economic profit = = $250,000 - $260,000 = -$10,000
CRC Economics 11
Questions to answerQ =P =
=====
r =
$25,000$150,000$400,000
Market rate of interest
Output (units)Price per unit
$100,000$300,000
$70,00010%
10
Costs of raw materialsValue of investment
Salary (if working for others)
Using own moneyUsing borrowed money
Is the business profitable? Why or why not?
Hint: Profitable > 0
The business is NOT profitable, because economic profit = = -$10,000 < 0.
CRC Economics 12
2. How to calculate and graph different revenue curves?
Calculating the revenues of a firm in perfect competition (i.e. a perfectly competitive firm).
Graph the corresponding revenue curves.
Calculating the revenues of a firm in imperfect/no competition.
Graph the corresponding revenue curves.
CRC Economics 13
Given the information below about a firm in perfect competition:
Answer the questions that follow.
a. Perfect competition
Q0
1
2
3
4
5
P$5
$5
$5
$5
$5
$5
CRC Economics 14
Questions to answerQ0
1
2
3
4
5
P$5
TR
Calculate total revenue (TR), where TR = P x Q.
$5
$5
$5
$5
$5
$0
$5
$10
$15
$20
$25
Calculate average revenue (AR), revenue per unit, where AR = TR / Q.
AR-
$5
$5
$5
$5
$5
MR-
$5
$5
$5
$5
$5
Calculate marginal revenue (MR), the revenue earned when selling one more unit, where MR = TR / Q.
CRC Economics 15
Questions to answer
Q0
1
2
3
4
5
P$5
TR
What are the special features of a firm in perfect competition?
$5
$5
$5
$5
$5
$0
$5
$10
$15
$20
$25
1. Price P is fixed , constant, unchanged.
AR-
$5
$5
$5
$5
$5
MR-
$5
$5
$5
$5
$5
2. (P = AR) = MR (D)
Special notes: (1) P = AR (always); (2) AR is also the firm’s demand curve (D).
CRC Economics 16
b. Revenue curves of a firm in perfect competition
P
Q
TR = PQ
P = AR= MR (D)$5
1
The TR curve is a straight line.It starts from the point of origin
and slopes upward.
0
The AR and MR curves are also straight lines. They coincide andare horizontal, starting from the
constant price P.
CRC Economics 17
Given the information below about a firm in imperfect/no competition:
Answer the questions that follow.
Imperfect/no competition
Q0
1
2
3
4
5
P$10
$8
$6
$4
$2
$0
CRC Economics 18
Questions to answerQ0
1
2
3
4
5
P$10
TR
Calculate total revenue (TR), where TR = P x Q.
$8
$6
$4
$2
$0
$0
$8
$12
$12
$8
$0
Calculate average revenue (AR), revenue per unit, where AR = TR / Q.
AR-
$8
$6
$4
$2
$0
MR-
$8
$4
$0
-$4
-$8
Calculate marginal revenue (MR), the revenue earned when selling one more unit, where MR = TR / Q.
CRC Economics 19
Questions to answer
Q0
1
2
3
4
5
P$10
TR
$8
$6
$4
$2
$0
$0
$8
$12
$12
$8
$0
AR-
$8
$6
$4
$2
$0
MR-
$8
$4
$0
-$4
-$8
What are the special features of a firm in imperfect/no competition?
1. Price P is variable. To sell more, the firm must lower price.
2. (P = AR) > MR
CRC Economics 20
b. Revenue curves of a firm in imperfect/no competition
P
Q
P = AR (D)
$8
5
The TR curve is an upside downparabola, starting from the pointof origin. TR is maximized at M.
0
The AR curve is a downward- sloping straight line.
TR = PQM
MRThe MR curve is
also a downward- sloping straight line.
When MR = 0,TR is maximized, at Ed = 1.
Ed = 1
CRC Economics 21
Given the information below about a firm in the short run:
Answer the questions that follow.
3. How to calculate and graph different product curves?
L0
1
2
3
4
5
Q0
6
11
15
18
20
CRC Economics 22
Questions to answer
L0
1
2
3
4
5
Q0
6
11
15
18
20
Calculate average product of labor (APL), where APL= Q / L.
Calculate marginal product of labor (MPL), the product/outputobtained when hiring one more worker, where MPL = Q / L.
APL
-
6.0
5.5
5.0
4.5
4.0
MPL
-
6.0
5.0
4.0
3.0
2.0
CRC Economics 23
Questions to answerL0
1
2
3
4
5
Q0
6
11
15
18
20
What happens to Q, APL, and MPL, when L rises? Why?
When L rises, i.e. more workers are employed, output Q rises,APL falls, and MPL falls.
APL
-
6.0
5.5
5.0
4.5
4.0
MPL
-
6.0
5.0
4.0
3.0
2.0
The principle of diminishing marginal product of labor takes effect.As L rises, MPL falls, and the production function becomes flatter.
CRC Economics 24
Product curves—TP = Q
Q
LL
TP = Q
MMaximum output
ZZero output
RDiminishing return point
SShutdown point
Where the law of diminishingreturns takes effect.
The tangent line goes throughthe curve.
Where a line from the point oforigin is tangent to the curve. Relevant section
CRC Economics 25
L
Product curves—AP & MP
Q
L
AP
M Z
R
SMP Relevant section
CRC Economics 26
Given the information below about a firm in the short run, where Q = output, FC = fixed cost, and VC = variable cost.
Answer the questions that follow.
4. How to calculate and graph different cost curves?
Q012345
FC$16
6789
10
VC$0
$18$31$41$49$59$72$90
$114$145$184
CRC Economics 27
Questions to answerQ012345
FC$16$16$16$16$16$16
6 $167 $168 $169 $16
10 $16
VC$0
$18$31$41$49$59$72$90
$114$145$184
What is FC at other levels of output?
Hint: FC is fixed at all levels of output.
CRC Economics 28
Questions to answerQ012345
FC$16$16$16$16$16$16
6 $167 $168 $169 $16
10 $16
VC$0
$18$31$41$49$59$72$90
$114$145$184
Calculate total cost, TC, where TC = FC + VC.
Calculate average fixed cost, AFC, where AFC = FC / Q.
TC$16$34$47$57$65$75$88
$106$130$161$200
Calculate average variable cost, AVC, where AVC = VC / Q.
AFC-
$16.0$8.0$5.3$4.0$3.2
AVC-
$18.0$15.5$13.7$12.3$11.8
$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4
CRC Economics 29
Questions to answerQ012345
FC$16$16$16$16$16$16
6 $167 $168 $169 $16
10 $16
VC$0
$18$31$41$49$59$72$90
$114$145$184
Calculate average total cost, ATC, where ATC = TC / Q = AFC + AVC.
Calculate marginal cost, MC, the cost of producing one more unit, where MC = VC / Q = TC / Q.
TC$16$34$47$57$65$75$88
$106$130$161$200
AFC-
$16.0$8.0$5.3$4.0$3.2
AVC-
$18.0$15.5$13.7$12.3$11.8
$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4
ATC-
$34.0$23.5$19.0$16.3$15.0
MC-
$18.0$13.0$10.0$8.0
$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0
CRC Economics 30
Questions to answerQ012345
FC$16$16$16$16$16$16
6 $167 $168 $169 $16
10 $16
VC$0
$18$31$41$49$59$72$90
$114$145$184
Is there a minimum value for AFC?
No, AFC has no minimum. As Q rises, AFC falls.
TC$16$34$47$57$65$75$88
$106$130$161$200
AFC-
$16.0$8.0$5.3$4.0$3.2
AVC-
$18.0$15.5$13.7$12.3$11.8
$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4
ATC-
$34.0$23.5$19.0$16.3$15.0
MC-
$18.0$13.0$10.0$8.0
$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0
CRC Economics 31
Questions to answerQ012345
FC$16$16$16$16$16$16
6 $167 $168 $169 $16
10 $16
VC$0
$18$31$41$49$59$72$90
$114$145$184
Is there a minimum value for MC?
Yes, the minimum point of MC (point R) occurs where P =$8.0, and Q = 4. MC falls, reaches the minimum, then rises.
The MC curve is U-shaped.
TC$16$34$47$57$65$75$88
$106$130$161$200
AFC-
$16.0$8.0$5.3$4.0$3.2
AVC-
$18.0$15.5$13.7$12.3$11.8
$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4
ATC-
$34.0$23.5$19.0$16.3$15.0
MC-
$18.0$13.0$10.0$8.0
$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0
CRC Economics 32
Questions to answerQ012345
FC$16$16$16$16$16$16
6 $167 $168 $169 $16
10 $16
VC$0
$18$31$41$49$59$72$90
$114$145$184
Is there a minimum value for AVC?
Yes, the minimum point of AVC (point S) occurs where P =$11.8, and Q = 5. AVC falls, reaches a minimum, then rises.
The AVC curve is U-shaped.
TC$16$34$47$57$65$75$88
$106$130$161$200
AFC-
$16.0$8.0$5.3$4.0$3.2
AVC-
$18.0$15.5$13.7$12.3$11.8
$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4
ATC-
$34.0$23.5$19.0$16.3$15.0
MC-
$18.0$13.0$10.0$8.0
$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0
CRC Economics 33
Questions to answerQ012345
FC$16$16$16$16$16$16
6 $167 $168 $169 $16
10 $16
VC$0
$18$31$41$49$59$72$90
$114$145$184
Is there a minimum value for ATC?
Yes, the minimum point of ATC (point B) occurs where P =$14.7, and Q = 6. ATC falls, reaches a minimum, then rises.
The ATC curve is U-shaped.
TC$16$34$47$57$65$75$88
$106$130$161$200
AFC-
$16.0$8.0$5.3$4.0$3.2
AVC-
$18.0$15.5$13.7$12.3$11.8
$2.7 $12.0$2.3 $12.9$2.0 $14.3$1.8 $16.1$1.6 $18.4
ATC-
$34.0$23.5$19.0$16.3$15.0
MC-
$18.0$13.0$10.0$8.0
$10.0$14.7 $13.0$15.1 $18.0$16.3 $24.0$17.9 $31.0$20.0 $39.0
CRC Economics 34
Q
Cost curves—FC, VC, and TC
$
Q
FC
VC
TC
R
R
S
B
Point B is where a line from the point of origin is tangent to the
TC curve. It is called thebreakeven point (in PC).
Point S is where a line from the point of origin is tangent to the
VC curve. It is called theshutdown point (in PC).
CRC Economics 35
Q
Cost curves—AVC, ATC, and MC $
Q
AVC
ATCMC
RS
B
CRC Economics 36
Q
Cost curves (in perfect competition)
$
Q
AVC
ATCMC
RS
BPbr
Psh
Breakeven price
Shutdown price
CRC Economics 37
Given the following information for a firm:
Answer the questions that follow.
4. How to calculate the profit-maximizing output level, Q*?
Q012345
P$60$60$60$60$60$60
6 $607 $608 $609 $60
10 $60
TC$30$42$66
$102$150$210$282$366$462$570$690
CRC Economics 38
Questions to answerQ012345
P$60$60$60$60$60$60
6 $607 $608 $609 $60
10 $60
TR$0
$60$120$180$240$300$360$420$480$540$600
Calculate TR and economic profit, , where = TR – TC.
TC$30$42$66
$102$150$210$282$366$462$570$690
-$30$18$54$78$90$90
MR-
$78$54$18-$30-$90
MC-
$12$24$36$48$60
M-
$48$36$24$12$0
$72 -$12$84 -$24$96 -$36
$108 -$48$120 -$60
$60$60$60$60$60$60$60$60$60$60
Calculate MR, MC, and M, where M = MR – MC.
CRC Economics 39
Questions to answerQ012345
P$60$60$60$60$60$60
6 $607 $608 $609 $60
10 $60
TR$0
$60$120$180$240$300$360$420$480$540$600
What is the profit-maximizing output level, Q*?
TC$30$42$66
$102$150$210$282$366$462$570$690
-$30$18$54$78$90$90
MR-
$78$54$18-$30-$90
MC-
$12$24$36$48$60
M-
$48$36$24$12$0
$72 -$12$84 -$24$96 -$36
$108 -$48$120 -$60
$60$60$60$60$60$60$60$60$60$60
Hint: Q* is produced where M = 0, or MR = MC.
Q* = 5, where = $90, and MR = MC = $60.
CRC Economics 40
Graphical approach
$0
$20
$40
$60
$80
$100
$120
$140
0 2 4 6 8 10 12
$
Q
MC
MR
Q*
E
Q* is found on the quantity axis where MR = MC.
CRC Economics 41
Now you know …
how to calculate different types of profits.
how to calculate and graph different revenue curves.
how to calculate and graph different product curves.
how to calculate and graph different cost curves.
how to calculate the profit-maximizing output level.
CRC Economics 42
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