Week 10

Managerial Economics

Order of Business

• Homework

• Assigned Lectures

• Other Material

• Lectures for Next Week

Midterm Examination

Q = 36-4p

2

1

24

34

Q

PSlope

Q = 36-4p

3

9

24

Q = 36-4p

3

9

24

72)6)(24(2

1

2

1 BHCS

Q = 36-4p

3

9

24

5

16

Q = 36-4p

3

9

24

5

16

8)2)(8(2

1

2

1 BHDWL

Joe Selling Shoes

$

HW

Y = 10H

Joe Selling Shoes

$

HW

Y = 10H

Y = 100 +7.5H

Joe Selling Shoes

$

HW

Y = 10H

Y = 100 +7.5H

U

Y

Ethyl Wilson

U

Y

U

Y

Widgets

Widgets

• The demand for widgets is Q = 10405- 25P.

• Right now each of 8 firms in the industry has a cost function

C = 2700 + 15q + 12q2. • What will be the price of widgets? How many

will be sold?•

Short Run

MC = 15+24q15+24q = Pq =(P-15)/24

For Eight FirmsQ = 8q = (P-15)/3

(P-15)/3= 10405-25P

P = $410.92Q = 132

Widgets

• Suppose now firms may enter and leave the industry freely. All new firms will have the same cost function. When equilibrium is reached (no firms want to enter of leave), what will be the price of widgets? How many firms will there be? How many widgets will each firm produce?

MC = 15 +24qAC = 2700/q +15 +12q

MC=AC2700/q = 12q

q = 15P = 15 +24(15) = 375

Q = 10405 – 25(P) = 10405-25(375) =1030

N = 1030/15 = 68.67

As you may have read the State of Ohio is facing a severe budget crisis. It is rumored that the State is considering a $5 per month per employee payroll tax. That is, each firm would be taxed $5 a month for each employee. Some opponents of this tax argue that it would make Ohio firms less competitive in the global marketplace; they propose that employees, not employers, be required to pay the tax. Supporters of the tax object, on the grounds that it would reduce incomes in a depressed economy. Comment: which proposal would leave workers better off? Firms better off? Which would have the greater impact on total Ohio employment?

As you may have read the State of Ohio is facing a severe budget crisis. It is rumored that the State is considering a $5 per month per employee payroll tax. That is, each firm would be taxed $5 a month for each employee. Some opponents of this tax argue that it would make Ohio firms less competitive in the global marketplace; they propose that employees, not employers, be required to pay the tax. Supporters of the tax object, on the grounds that it would reduce incomes in a depressed economy. Comment: which proposal would leave workers better off? Firms better off? Which would have the greater impact on total Ohio employment?

The answer to the question is “This is a subtle problem, but the answer is simple. Since the incidence of the tax is independent of who pays the tax, it doesn’t matter which option is chosen

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

• What Causes Monopolies

• More on Monopolies

• Managing with Multiple Plants

• Innovation and Durability

• Monopolistic Competition

•What Causes Monopolies

•More on Monopolies

•Managing with Multiple Plants

• Innovation and Durability

•Monopolistic Competition

Lectures for Next Week

• Cartels

• Duopoly

• The Cournot Model

• A Second Cournot Example

• Extending the Cournot Model

• The Bertrand Model

• Nash Equilibrium

•Cartels

•Duopoly

•The Cournot Model

•A Second Cournot Example

•Extending the Cournot Model

•The Bertrand Model

•Nash Equilibrium