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    Task 8+9

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    bendermacherrick
    The document discusses the conditions for perfect competition and applies them to the bus transport market. It also provides the short-run and long-run supply curves for a perfectly competitive firm. In the short-run, firms produce where price equals marginal cost. Profits are shown as the difference between marginal cost and average cost. In the long-run, zero economic profits are achieved as entry and exit continues until price equals average cost. The impact of a diesel tax, which shifts costs up, is explained as increasing price in the short-run and long-run until consumers pay the full tax amount.

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    Task 8+9

    Uploaded by

    bendermacherrick
    11 views4 pages
    The document discusses the conditions for perfect competition and applies them to the bus transport market. It also provides the short-run and long-run supply curves for a perfectly competitive firm. In the short-run, firms produce where price equals marginal cost. Profits are shown as the difference between marginal cost and average cost. In the long-run, zero economic profits are achieved as entry and exit continues until price equals average cost. The impact of a diesel tax, which shifts costs up, is explained as increasing price in the short-run and long-run until consumers pay the full tax amount.

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    The document discusses the conditions for perfect competition and applies them to the bus transport market. It also provides the short-run and long-run supply curves for a perfectly competitive firm. In the short-run, firms produce where price equals marginal cost. Profits are shown as the difference between marginal cost and average cost. In the long-run, zero economic profits are achieved as entry and exit continues until price equals average cost. The impact of a diesel tax, which shifts costs up, is explained as increasing price in the short-run and long-run until consumers pay the full tax amount.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    11 views4 pages

    Task 8+9

    Uploaded by

    bendermacherrick
    The document discusses the conditions for perfect competition and applies them to the bus transport market. It also provides the short-run and long-run supply curves for a perfectly competitive firm. In the short-run, firms produce where price equals marginal cost. Profits are shown as the difference between marginal cost and average cost. In the long-run, zero economic profits are achieved as entry and exit continues until price equals average cost. The impact of a diesel tax, which shifts costs up, is explained as increasing price in the short-run and long-run until consumers pay the full tax amount.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Task 8

    1. What conditions are needed to obtain a market structure with perfect competition?

    Firms are said to be in perfect competition when the following conditions occur: (1) many firms produce
    identical products; (2) many buyers are available to buy the product, and many sellers are available to
    sell the product; (3) sellers and buyers have all relevant information to make rational decisions about the
    product being bought and sold; and (4) firms can enter and leave the market without any restrictions—in
    other words, there is free entry and exit into and out of the market. (5) No transaction costs. (6) Firm is
    price taker. (7) No economic profit.

    2. Are these conditions satisfied for the market for bus transport services?

    Yes, the market for bus transport to sunny destinations is characterized by the presence of a
    considerable number of relatively small bus companies, selling very similar products. It is not too hard
    to enter this market. Government imposes only few entry regulations, and the capital requirements are
    not excessive. It seems that most of the conditions for a perfectly competitive market structure are
    satisfied.

    3. How is supply related to the market price in the short run? Do not just state the relevant considerations
    in
    words, but ..
    - show the implied short-run supply curve in the graph;
    - derive the mathematical expression for that supply curve.
    Producing until P = MC
    Above AVC-curve, because otherwise you pay more variable costs than revenue you will generate. Short-
    run supply curve follows MC-curve above AVC-curve.
    C(Q) = 200 + 200q – 16q^2 + 0.8q^3
    AVC = (200q – 16q^2 + 0.8q^3)/q
    = 200 – 16q + 0.8q^2
    MC = TC’(q)
    = 200 – 32q + 2.4q^2 = P
    2.4q^2 – 32q + 200 – P = 0
    q = (32 + √ (9.6 P−896))/4.8

    AVC = MC  q = 10 and P = 120


    If P < 120 Qs = 0
    If P > 120 Qs = (32 + √ (9.6 P−896))/4.8
    4. How can we derive the profits of the firm from the picture?
    Q x Price – (Q x AC)
    Difference between MC and AC

    5. What is the structure of market supply in the long run?

    To understand how short-run profits for a perfectly competitive firm will evaporate in the long
    run, imagine the following situation. The market is in long-run equilibrium, where all firms earn
    zero economic profits producing the output level where P = MR = MC and P = AC. No firm has
    the incentive to enter or leave the market. Let’s say that the product’s demand increases, and with
    that, the market price goes up. The existing firms in the industry are now facing a higher price
    than before, so they will increase production to the new output level where P = MR = MC.

    This will temporarily make the market price rise above the average cost curve, and therefore, the
    existing firms in the market will now be earning economic profits. However, these economic
    profits attract other firms to enter the market. Entry of many new firms causes the market supply
    curve to shift to the right. As the supply curve shifts to the right, the market price starts
    decreasing, and with that, economic profits fall for new and existing firms. As long as there are
    still profits in the market, entry will continue to shift supply to the right. This will stop whenever
    the market price is driven down to the zero-profit level, where no firm is earning economic
    profits.

    6. What is the impact of an increase in the diesel tax on the equilibrium of the market?

    The diesel tax shift the MC, AC and AVC up, and so the price goes up.
    Short-run: Price increases and quantity decreases.
    They pay both for the taxes.
    Price increases less than the tax.
    Long-run: supply curve up by amount of tax.
    Consumers pay everything because suppliers make no economic profit.

    Task 9
    1. What is consumer surplus?

    Consumer surplus is an economic measurement of consumer benefits. A consumer surplus happens


    when the price that consumers pay for a product or service is less than the price they're willing to pay.
    It's a measure of the additional benefit that consumers receive because they're paying less for
    something than what they were willing to pay.

    2. What is producer surplus?


    Producer surplus is the difference between how much a person would be willing to accept for given
    quantity of a good versus how much they can receive by selling the good at the market price. The
    difference or surplus amount is the benefit the producer receives for selling the good in the market. A
    producer surplus is generated by market prices in excess of the lowest price producers would otherwise be
    willing to accept for their goods.

    3. How to compute the consumer and producer surplus and total welfare in the current situation?
    Producer surplus: 0
    Consumer surplus: 125,000 x 10,000 + 125,000 x 10,000 x ½ = 1,875,000,000
    Total welfare: 1,875,000,000 + 0 = 1,875,000,000

    4. How to compute the consumer and producer surplus and total welfare with free trade in kidneys?
    Consumer surplus: 16,000 x (250,000-50,000) x ½ = 1,600,000,000
    Producer surplus: 10,000 x 50,000 + ½ x 6,000 x 50,000 = 650,000,000
    Total welfare: 1,600,000,000 + 650,000,000 = 2,250,000,000

    5. What is a deadweight loss, how does it come about, and how can it be calculated in the case at hand?

    A deadweight loss is a cost to society created by market inefficiency, which occurs


    when supply and demand are out of equilibrium. Mainly used in economics, deadweight loss can be
    applied to any deficiency caused by an inefficient allocation of resources.

    Price ceilings, such as price controls and rent controls; price floors, such as minimum wage and living
    wage laws; and taxation can all potentially create deadweight losses. With a reduced level of trade, the
    allocation of resources in a society may also become inefficient.

    2,250,000,000 – 1,875,000,000 = 375,000,000


    OR
    6,000 x 125,000 x ½ = 375,000,000

    P = 250,000 – 12.5Q
    12.5Q = 250,000 – P
    Qdemand = 20,000 – 0.08P
    P = -83,333.33 + 8.33Q
    -8.33Q = -83,333.33 – P
    Qsupply = 10,000 + 0.12P

    Hint to find supply and demand curves: the task mentions that in the early 2000s (when kidney donation is
    free, i.e. p=0), there were 10 000 kidneys transplanted. At the same time, there was still a shortage of 10
    000 kidneys (despite the 10 000 transplantation, 10 000 kidneys were still demanded). This information
    should allow you to find one point on the supply curve and one point on the demand curve, respectively.
    At a price of 50 000 (p=50 000), you are given that the quantity of kidneys demanded is estimated at 16
    000 and that 6000 additional kidneys would be supplied compared to the previous situation in which p=0.
    This should allow you to find a second point on the demand and on the supply curve, respectively. With
    two points on the demand curve and two points on the supply curve, you should be able to find and
    represent the demand and supply curves.

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