Question 5

6-5 FIGURE Price $10 9 8 7 6 5 4 3 2 1 o Total revenue $25 24 21 16 9 The Price Elasticity of Demand Elastic Unit-elastic Changes Along the Demand Curve Demand Schedule and Total Revenue for a Linear Demand Curve 1 Price $0 1 2 3 4 5 6 7 8 9 10 Quantity demanded 10 9 8 7 6 5 4 3 2 Total revenue $0 9 16 21 24 25 24 21 16 9 2 2 3 3 4 4 5 6 6 7 7 8 8 Inelastic 9 10 Quantity 9 10 Quantity The upper panel shows a demand curve corre- sponding to the demand schedule in the table. The lower panel shows how total revenue changes along that demand curve: at each price and quantity combination, the height of the bar rep- resents the total revenue generated. You can see that at a low price, raising the price increases total revenue. So demand is inelastic at low prices. At a high price, however, a rise in price reduces total revenue. So demand is elastic at high prices. Demand is elastic: a higher price reduces total revenue. Demand is inelastic: a higher phce increases total revenue.

  • The total revenue (total cost) remains the same when demand is unit-elastic

Question 8

  • Average variable costs are increasing when marginal costs are higher than average variable costs

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Question 10

  • If price falls less than AVC, then you should shut down the company.

  • Long-run (Profitability)

    Profitability condition (minimum ATC = break-even price) P \> minimum ATC P = minimum ATC P < minimum ATC Result Firm profitable. Entry into industry in the long run. Firm breaks even. No entry into or exit from industry in the long run. Firm unprofitable. Exit from industry in the long run.

  • Short-run (Production)

    Production condition (minimum AVC = shut-down price) P \> minimum AVC P = minimum AVC P < minimum AVC Result Firm produces in the short run. If P < minimum ATC, firm covers variable cost and some but not all of fixed cost. If P \> minimum ATC, firm covers all variable cost and fixed cost. Firm indifferent between producing in the short run or not. Just covers variable cost. Firm shuts down in the short run. Does not cover variable cost.

Question 14

CSI psacs) CSO (g-q) 100 4<100

Question 15

  • Both consumers and producers bear a part of the total tax burden.

Question 17

  • Economic Profit = Accounting Profit - Opportunity Cost

  • In a perfectly competitive industry, the Economic Profit = 0.

  • So, Account Profit = Opportunity Cost

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