Week 8

Managerial Economics

Order of Business

• Homework

• Assigned Lectures

• Other Material

• Lectures for Next Week

Homework-Last Week

• Pashigian, Chapter 6, Exercise 5.

The two methods will probably not result in the same level of utilization. Economic efficiency requires that the marginal cost of a barrel of oil at Well A equals the Marginal Cost of Well B. If the two plants have the same cost function, then marginal cost will equal if they produce the same amount. If they do not have the same marginal cost function, which is more likely, then the two methods will result in different utilization rates.

• Pashigian, Chapter 6, Exercise 9

It must have been prior to 1982 that the minimum of the AC curve moved to the right, due to a change in the technology of brewing beer. This does not indicate a cost function with economies of scale, meaning that the AC curve never turns upward. After all, there were 67 breweries in 1982. After then, the same phenomenon moved the minimum of the AC curve to the left. One speculation is that it was the rise of microbreweries, paralleling the rise of minimills such as Pashigian discusses in the steel industry. But, while I am no expert on beer, I think the rise of microbreweries comes too late to explain data from the early 1980's

• All the competitive firms in an industry have a cost function C = 16 + 2q + q2. The demand function is Q = 800 - 20p. Assuming that firms can enter and leave freely, what will be the equilibrium price of the product? The equilibrium quantity sold? The number of firms?

AC = 16/q +2 + q; MC = 2 + 2q

q = 4MC = AC =10

Q = 800-20(10) =600N=600/4

• A firm has a cost function

C = 16 + 2q + q2.

• The current price of the product in the market is 30. How many units should the firm produce? What will be its profits?

MC = 2 + 2q30 = 2 + 2q q = 14

= PQ – C(Q)= 30(14) –[16+2(14)+142]

=180

• Quantity Cost• 0 10• 1 12• 2 14• 3 17• 4 20• 5 25• 6 32• 7 41

• Assuming that the current price of the product is $9, how many units should the firm produce (remember our rules for breaking ties)? If all other firms in the industry have the same cost function, what will be the equilibrium price of the product?

Assuming that the current price of the product is $9, how many units should the firm produce? If all other firms in the industry have the same cost function, what will be the equilibrium price of the product?

• Quantity Cost• 0 10• 1 12• 2 14• 3 17• 4 20• 5 25• 6 32• 7 41

• Assuming that the current price of the product is $9, how many units should the firm produce (remember our rules for breaking ties)? If all other firms in the industry have the same cost function, what will be the equilibrium price of the product?

Assuming that the current price of the product is $9, how many units should the firm produce? If all other firms in the industry have the same cost function, what will be the equilibrium price of the product?

• Quantity Cost• 0 10• 1 12• 2 14• 3 17• 4 20• 5 25• 6 32• 7 41

• Assuming that the current price of the product is $9, how many units should the firm produce (remember our rules for breaking ties)? If all other firms in the industry have the same cost function, what will be the equilibrium price of the product?

Assuming that the current price of the product is $9, how many units should the firm produce? If all other firms in the industry have the same cost function, what will be the equilibrium price of the product?

A question not Asked• Quantity Cost• 0 10• 1 12• 2 14• 3 17• 4 20• 5 25• 6 32• 7 41

• Assuming that the current price of the product is $9, how many units should the firm produce (remember our rules for breaking ties)? If all other firms in the industry have the same cost function, what will be the equilibrium price of the product?

Assuming that the current price of the product is $9, how many units should the firm produce? If all other firms in the industry have the same cost function, what will be the equilibrium price of the product?

And now much will each firm produce?

Homework-This Week

Pashigian, Chapter 9, Exercises 1 and 2

The market for Thumpleblowers is global and highly competitive. Many European and Japanese firms offer Thumpleblowers for sale in the United States at $80 each. The demand for Thumpleblowers in the United States has been extensively studied.

Q = 5000 - 50p.

Acme: C = 10 + 10Q + 5Q2

Baker: C = 20 + 6 Q +Q2

How many Thumpleblowers will Acme Produce? Baker? How many will be imported?

True or False?

•Normally competitive firms with constant long run costs find that increases in market demand mean no increase in long run profits. This is also true if there are pecuniary external diseconomies.

True or False?

•If a new technology for producing a product is discovered so that it is possible to build plants that have lower unit production costs than existing plants for any given level of production, it will be economical to shut down existing plants quickly.

A monopoly has a demand function

Q = 1000 - 20 P.

It has the capability to build plants with a cost function given by the following table:

Quantity Cost

0 101 122 143 174 205 256 327 41

What will it sell the product for? How many plants will it operate? How many units will it sell?

Lectures for This Week

• Monopoly

• Applying the Monopoly Model

• A Spreadsheet Approach

• Solving the Problems

• The Monopolist’s Demand Curve

• A Monopoly Problem

•Monopoly

•Applying the Monopoly Model

•A Spreadsheet Approach

•Solving the Problems

•The Monopolist’s Demand Curve

•A Monopoly Problem

Lectures for March 11

•None

Lectures for March 18

• What Causes Monopolies

• More on Monopolies

• Managing with Multiple Plants

• Innovation and Durability

• Monopolistic Competition

• Cartels

•What Causes Monopolies

•More on Monopolies

•Managing with Multiple Plants

• Innovation and Durability

•Monopolistic Competition

•Cartels