6· The long run a. b. c. Refers to a period of time over one year. Refers to the
ID: 1119703 • Letter: 6
Question
6· The long run a. b. c. Refers to a period of time over one year. Refers to the length of time needed before all inputs may be treated as variable. Refers to the time it takes to get into equilibrium in case of diminishing returns to scale. All of the above d. 7. If the price of a variable input rises, a competitive firm in the short run will a. Increase output to cover the cost increase b. Increase selling price to cover the cost increase c. Decrease quantity of output d. Change nothing until the long run e. Decrease selling price in hopes of making it up on volume 8. A revenue maximizing firm has a linear demand function Q-54-3p. The optimal price and maximum revenue are respectively a. Optimal price is 18 and maximum revenue is $729 b. Optimal price is 18 and maximum revenue is 524 c. Optimal price is the reservation price and maximum revenue is 972 d. Optimal price is 9 and maximum revenue is 243 e. Optimal price is 24 and maximum revenue is 648 Assume the same demand function as in Q.8 and a cost function C(Q)=1 + Q. If the firm decides to maximize profit, its optimal price will be a. b. 9.35 c. 15.75 d. 17.45 e. 18Explanation / Answer
(6) (b)
In long run, all inputs are considered variable.
(7) (c)
Competitive firm, being price taker, cannot raise price if input cost rises, therefore it reduces output.
(8) (d)
Q = 54 - 3p
3p = 54 - Q
p = (54 - Q) / 3
Total revenue (TR) = p x Q = (54Q - Q2) / 3
TR is maximized when dTR / dQ (= MR) is zero:
(54 - 2Q) / 3 = 0
54 - 2Q = 0
2Q = 54
Q = 27
P = (54 - 27) / 3 = 27 / 3= $9
TR = $9 x 27 = $243
(9) (c)
Marginal cost (MC) = dC / dQ = 2Q
Profit is maximized when MR = MC.
(54 - 2Q) / 3 = 2Q
54 - 2Q = 6Q
8Q = 54
Q = 6.75
P = (54 - 6.75) / 3 = 47.25 / 3 = 15.75
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