Economics of Enterprise Answers

A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275.
a What are the firm’s ATC per unit at each of these three levels of production?
b If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?
c From what you know about these firms cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium?
d If that price ends up being the market price and if the normal rate of profit is 10 percent, then what will each firm’s

a. General Mills and Kellogg are two of the biggest players in the market for breakfast cereals. At their current level of operation, each makes $6 million per year in profit. Both are considering costly new advertising campaigns to gain market share. If one moves forward with the advertising campaign but the other does not, the one that moves forward expands market share and increases profit to $8 million while the other loses market share and profit falls to $2 million. If both adopt a new costly advertising campaign, then both companies’ profits fall to $4 million. Set up a payoff matrix to describe this decision-making situation.

b. Why is the drug cartel more effective than the oil cartel?

a. Explain the production possibilities frontier (PPF).
b. Analyse what it means for the PPF to be bowed out from the origin (curved), and what it means for the PPF to be a straight line.
c. State the Law of Increasing Opportunity Cost and explain why it holds.

Two traditional economies are trying to industrialize. The leaders of the first favor a command economic system. The leaders of the second want to try more free market-based policies. Which of the following actions would likely occur in one but not the other industrializing economy?

1. Conversion of farmland from agriculture to industry
2. Export of surplus goods not consumed locally
3. Investment in loans to support independent start-ups
4. Payment of workforce based on units of production

Paul and his friend Tori make decorative art out of silver spoons. They want to start a business that they can easily dissolve when they move on to their next project. Which of these will suit their needs best?

Question 4
a.As the price of oranges rises, the demand for oranges falls, ceteris paribus.” Explain.
b. “The price of a bushel of wheat was $3.00 last month, and $2.50 today. The demand curve for wheat must have shifted leftward between last month and today.” Discuss.

c. Some goods are bought largely because they have ‘snob appeal.’ For example, the residents of Beverly Hills gain prestige by buying expensive items. In fact, they would not buy some items unless they are expensive. The law of demand, which holds that people buy more at lower prices than at higher prices, obviously does not hold for the residents of Beverly Hills. The following rules apply in Beverly Hills: high prices, buy; low prices, don’t buy.” Do you agree? Discuss.

Question2:
a. Consider public policy aimed at smoking;
i. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?

ii. Studies also find that teenagers have higher price elasticity than do adults. Why
might this be true?

b. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

Price Quantity Demanded Quantity Demanded
(business travelers) Quantity Demanded
(vacationers)
$200 2,000 tickets 800 tickets
$250 1,900 tickets $ 600 tickets
$300 1,800 tickets 400 tickets
As the price of tickets rises from $200 and $250, what is the price elasticity of demand for
(i) business travellers and (ii) vacationers? (Use the midpoint method in your calculations)
ii. Why might vacationers have a different elasticity from business travellers?

Question2:

Widgets are provided by a competitive constant-cost industry where each firm has fixed costs of $30. The following chart shows the industry-wide demand curve and the marginal cost curve of a typical firm:

INDUSTRY-WIDE DEMAND FIRM’S MARGINAL COST CURVE
Price l Cost Quantity Quantity Marginal Cost
$5 1500 1 $5
10 1200 2 10
15 900 3 15
20 600 4 20
25 300 5 25
30 200 6 30
35 140 7 35
40 50 8 40

a.What is the price of a widget?

b. How many firms are in the industry?
For the remaining four parts of this question, assume that the government imposes an excise tax of $15 per widget.
c. In the short run, what is the new price of widgets?
d. In the short run, how many firms leave the industry?
e. In the long run, what is the new price of widgets?
f. In the long run, how many firms leave the industry?