Economics Model Answers Seven - 2013

1. Identify the four elements of perfect competition.

1. Many buyers (consumers) and sellers (firms).

2. Goods that are perfect substitutes for each other.

3. A market where there is perfect knowledge needed to choose what to buy

4. A market that has perfect mobility or access to resources.

2. Describe how you might use competition, perhaps even competing with yourself, to motivate yourself to achieve more.

Set a goals for yourself each day. Write them down at the beginning of the day, and then "compete" with your list to see how many of the goals you achieve.

3. Write the equations for TC, FC, ATC, and AFC, and give an example of how they would be used.

TC = FC + TVC , which is the sum of the fixed cost and variable cost. Example: the total cost of running a gas station is the cost of the building and the gas pumps and the wages for the workers and the gasoline itself, which includes both fixed and variable costs.

FC = TC when the quantity Q produced by your firm is zero. Example: the fixed cost (FC) for a restaurant is the cost of renting or buying the building, cooking equipment, and utensils such as forks and spoons.

ATC = TC / Q , which is the average total cost per unit of the good produced. For example, if the total cost for making 100 pizzas a day is $500, then the average total cost (ATC) is $500 / 100 = $5 per pizza.

AFC = FC / Q , which is the fixed cost per unit of the good produced. For example, if the fix cost of the pizza palor (just the building, cooking equipment, and utensils such as forks and spoons) is $300 per day, then the average fixed cost (AFC) is $300 / 100 = $3 per pizza.

4. Do you think the converse of Gresham's Law is true with respect to speech and conversation? Specifically, does good speech or conversation (such as discussing the Bible) drive out bad speech? Explain.

Yes, just as bad speech tends to drive out good speech, an effort at good speech (for example, talking about the Bible) does tend to drive out bad speech. But it takes effort, or else people seem to drive towards uninformative, unspiritual chatter.

5. Explain the difference between total cost, average cost, and marginal cost.

Total cost is the entire costs that a firm has when it starts, such as the cost of the building and equipment. Average cost equals this total cost divided by the quantity of goods produced, which is TC/Q. Marginal cost is the additional expense for making one additional unit.

6. Suppose you decide you could profitably set the price for a homeschool dinner event at $15 per ticket, and it would have attracted 150 people. You also determine that 50 out of the 150 people who would have attended would have paid $20 per ticket and 10 out of the 150 would have paid $25 per ticket, and 5 out of the 150 would have paid $30 per ticket, because they would have enjoyed and benefited so much from it. However, this homeschool dinner event was never held because no one "got around to it." What is the loss in wealth or consumer surplus due to the fact that the event was not held?

7. Explain what the "CPI" is, and why the real price of a good is decreasing if its price remains constant while the CPI increases from year-to-year. An example of this might be the real price of laptop computers from 2012 to 2013.

Honors

8. Explain what the Producer Surplus is, and provide an example.

9. Suppose the underlying labor market is perfectly competitive, but there is a minimum wage above the market rate. Then suppose that the supply of labor increases. Explain what the result is and why.

10. What is the firm's profit or loss when Q=0 in the honors discussion above? (Answer simply in terms of another cost measure.) Is the firm profitable?

11. (Challenging, with extra credit) Prove mathematically that MC>MR for all Q>0 in the honors discussion above. (Hint: define MC in terms of the change in AVC, and then regroup the terms and draw conclusions about them to show MC>MR).