Quantity Produced_____Total Cost 0____________________$15 1____________________$
ID: 1237040 • Letter: Q
Question
Quantity Produced_____Total Cost0____________________$15
1____________________$21
2____________________$33
3____________________$50
4____________________$72
5____________________$95
6____________________$120
Miguel is a farmer who produces oats. The oat market is a pure competition market. Miguel is now making choices in the short run. The going rate for oats is currently $24 per unit. The total cost function is as the table above shows. The profit-maximizing level of output is 5.
a) Should Miguel expect a change in the number of firms in the industry? Explain.
b) The government imposes a $1.50 tax per unit of oats. How will this affect the quantity of output in the long run for Miguel?
PLEASE EXPLAIN YOUR ANSWER.
Explanation / Answer
Quantity Produced_____Total Cost
0____________________$15
1____________________$21
2____________________$33
3____________________$50
4____________________$72
5____________________$95
6____________________$120
Miguel is a farmer who produces oats. The oat market is a pure competition market. Miguel is now making choices in the short run. The going rate for oats is currently $24 per unit. The total cost function is as the table above shows. The profit-maximizing level of output is 5.
a) Should Miguel expect a change in the number of firms in the industry? Explain.
At the output level of 5, out total cost is $95 and out marginal cost is ($95 - $72) = $18
This is less than our marginal revenue, which in a market of perfect competition (like this one) is equal to the price, which is given as $24.
Since MC < MR, something will happen to increase marginal costs or decrease marginal revenue. One way of this happening is for the number of firms in the market to increase. So, yes, Miguel should expect a change in the number of firms in the industry.
b) The government imposes a $1.50 tax per unit of oats. How will this affect the quantity of output in the long run for Miguel?
This will cause the price -- the MARGINAL REVENUE -- of each oats unit to increase from $24 to $25.50.This means that all of the firms in the market are now seeking a marginal cost as close as possible to $25.50, NOT $24. This means that everyone have to cut back output to 3, since at that output MC is $27, which is closer to $25.50 than the $22 MC at an output level of 4.
PLEASE EXPLAIN YOUR ANSWER. I did :)
I hope that you found this answer useful towards your studies. It took a considerable amount of thought, time, and effort to compose, and and I'd sincerely appreciate a lifesaver rating! It would really make my day, and will allow me to continue answering your questions :)