1. Discussion Session 2

2. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity of apples (pounds) Willingness to payMarginal Benefit 0$0 1$7 2$13 3$18 4$22 5$25

3. Marginal Benefit The following table shows Abby’s willingness to pay for apples Calculate her marginal benefit from apples. Quantity of apples (pounds) Willingness to payMarginal Benefit 0$0- 1$77 2$136 3$185 4$224 5$253

4. Marginal Benefit Let’s draw Abby’s individual demand curve for apples. If the market price of apples is $5/lb, how many pounds of apples will Abby buy? Abby will buy if P<MB, until P = MB, so she will buy 3 lbs of apples. What is her consumer surplus? It is TB – P x Q = 18 – 5 x 3 = 18 – 15 = 3

5. Marginal Benefit

6. Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 08 112 215 321 430 550

7. Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088 1128 2158 3218 4308 5508

8. Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088- 11284 21583 32186 43089 550820

9. Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 112844 215873 3218136 4308229 55084220

10. Cost Curves 1)Fill out the entries in the table. 2)Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 11284 4 215877.53 32181376 4308227.59 5508421020

11. Cost Curves 2) Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088---- 11284 44 215877.53.53 32181374.336 4308227.55.59 550842108.420

12. Cost Curves 2) Suppose that the firm is a price taker, and market price is $9. What quantity will the firm produce? The firm produces quantity where P = MC. When MC = $9, Q = 4 QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 11284 44 215877.53.53 32181374.336 4308227.55.59 550842108.420

13. Cost Curves 3) What is the profit/loss? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 11284 44 215877.53.53 32181374.336 4308227.55.59 550842108.420

14. Cost Curves 3) What is the firm’s profit/loss? Profit = Total Revenue – Total Cost = P x Q – ATC x Q = 9 x 4 - 7.5 x 4 = 6 QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 11284 44 215877.53.53 32181374.336 4308227.55.59 550842108.420

15. Cost Curves 4) What is the break-even price? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 11284 44 215877.53.53 32181374.336 4308227.55.59 550842108.420

16. Cost Curves

17. 4) What is the break-even price? The break-even price equals to the minimum of ATC = $7 QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 11284 44 215877.53.53 32181374.336 4308227.55.59 550842108.420

18. Cost Curves 5) What is the shut-down price? QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 11284 44 215877.53.53 32181374.336 4308227.55.59 550842108.420

19. Cost Curves 5) What is the shut-down price? The shut-down price equals to the minimum of AVC = $3.5 QuantityTotal Cost (TC) Fixed Cost (FC) Variable Cost (VC) Average TC (ATC) Average VC (AVC) Marginal Cost (MC) 088-- 11284 44 215877.53.53 32181374.336 4308227.55.59 550842108.420

20. Deriving the Market Supply Curve Derive the market supply curve QuantityFirm A MC Firm B MC 0 1 1015 2 2025 3 3545 4 5565 5 80100

21. The Rise and Fall of Industries Suppose that apple farming in the United States can be represented by a competitive industry. Currently the industry is in long run equilibrium. Consider the case of cost-reducing technologies. For examples, scientists develop new high-yield seeds that produce more apples at a lower cost. 1) Explain how the industry would adjust to a decrease in cost of production of apples. 2) Analyze what happens in the short run as well as in the long run.