Below I've posted a few questions from former and current students.
Question:
hi Justin!
I m have a question about chapter 13 question 19!
In this question, it asks to find the optimal price and output, profit. Then it also asks if the firm set entry fees , what is the optimal price!
I found out the price and output, as well as the profit, but I can't find if the entry fees are set! Can you help me?
Thank you
Answer:
Hi XXX,
Remember, a firm charging an entry fee will want to set the price of the good to equal the marginal cost, and then charge an entry fee equal to the resulting consumer's surplus. The MC here is a constant $10 (the change in TC as Q increases), so the firm should set P=$10. At P=$10 consumers will demand Q=90, so the consumer's surplus will be (1/2)(90)(90)=$4050, which is the entry fee the firm will want to charge.
Justin
__________________________________________________________________________________________
Question:
Hey Justin,
Could you quickly explain to me why MP and MC curves are inversely related?
Thanks in advance!
XXXXX.
Answer:
Hi XXXXX,
The answer is very intuitive. You already know that Total Product curves begin to increase at a decreasing rate once they pass the inflection point. This is where the Marginal Product begins to slope downward. What this means is that you have a decreasing marginal product (of one of your inputs... let's say labour). That means that each additional worker you add to your company from this point on adds less output that the last (the "too many cooks in the kitchen" sort of deal). So if you want to produce 20 units of output past the inflection point, the first guy may produce 1, but then the second may produce .5, the third may produce .3, and the fourth may produce .2. But Marginal Cost is the cost of producing one more unit of output. That means that the cost of producing each of those units has been increasing as you hired more workers. So you only had to pay one worker for the first unit of production beyond the inflection point, but you had to pay THREE workers for the second unit (the second, third and fourth workers produce .5, .3 and .2 units respectively, which add to 1). This clearly means it would have been costlier to produce the second unit than it was to produce the first one. Hence an UPWARD sloping MC curve BEYOND the inflection point.
I hope that helps.
__________________________________________________________________________________________
Question:
Hey Justin,
Does a Nash Equilibrium represent what a player wants or what he gets?
Answer:
A Nash Equilibrium is an outcome from which no player wants to unilaterally deviate. Just because a possible outcome (or many possible outcomes) are Nash Equilibria, that does not mean that the result of a game actually WILL be one of those Nash Equilibria. Take the Battle of the Sexes game as an example: it has two Nash Equilibria, but we may not end up at either of them (the players could end up choosing different events to go to). But the two nash equilibria are still nash equilibria. That is, if they had ended up at the same event (either of the two events), then neither of them would have wanted to unilaterally deviate from that outcome.
I hope that helps.
______________________________________________________________
Question:
Hello Justin,
I am XXXXX. I have a question about rent. What is rent. And is rent always equal to producer's surplus? Is rent equal to profit?If not, when will it equal to profit? Hope you can reply to me soon.
Thank you a lot!!
Answer:
Hi XXXXX,
Good question. Rent is any revenue a firm earns beyond its VARIABLE costs. Profit is any revenue a firm earns beyond its TOTAL costs. Only if TC = VC does Rent = Profit (this is when FC = 0). You can think of the formula as being: Rent = TR - VC. On the graph with P=MR=AR, ATC, AVC, AFC, and MC, you can draw a dashed line from the point where MC=MR(=P) down to the x-axis to find the profit maximizing amount of output q*. If the MR line (the price) is below minimum point of the AVC curve (the shut-down point. This is where the MC curve intersects the AVC curve), then the firm will not produce anything. If the MR line is above the AVC curve then the firm will produce a positive quantity. The point where this dashed line you just drew INTERSECTS the AVC curve will be the AVC for producing that particular level of output q*. You can draw a horizontal dashed line from this point to the y-axis to find AVC*. As long as AVC* is NOT = to P, there will be some rectangular area between P and AVC*. This area is the economic rent. AVC* times q* is the VC. P time q* is the TR. TR - VC = Rent.
So, as I already said: Rent is any revenue a firm earns beyond its VARIABLE costs. Profit is any revenue a firm earns beyond its TOTAL costs. Only if TC = VC does Rent = Profit (this is when FC = 0). Profit is always a part of Rent, and is always equal to OR SMALLER THAN Rent. Rent can be positive even when Profit is negative. If Profit > 0, then Rent is definitely > 0. But Rent cannot be negative. If Rent is negative, then P is below the shut-down point and the firm will shut-down (produce nothing).
I hope that helps.