Survey of Econ 3Rd Edition Sexton Solutions Manual Full Chapter PDF
Survey of Econ 3Rd Edition Sexton Solutions Manual Full Chapter PDF
Survey of Econ 3Rd Edition Sexton Solutions Manual Full Chapter PDF
Section Summaries
The following section summaries appear on the Student Review Cards.
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Determining whether the firm is generating economic profits can be done in three easy
steps. First, find the profit-maximizing output level, where marginal revenue equals
marginal cost. Second, identify the market price and find total revenue at the profit-
maximizing output level. Third, multiply the average total cost by the output level to find
the total cost. If total revenue is greater than total cost, the firm is generating economic
profits, and if total revenue is less than total cost then the firm is generating economic
losses. If total revenue and cost are equal, the firm has zero economic profit—a normal
return.
A firm making an economic loss must decide whether to continue producing or
shut down. If it cannot cover its average variable cost, the firm will shut down in the
short run.
The short-run market supply curve is the summation of all the individual firms’
supply curves (that is, the portion of the firms’ MC above AVC) in the market.
Use the Teaching Tips to plan what key concepts you wish to emphasize.
Teaching Tips
You can also find selected teaching tips located on your Chapter 7 Instructor Prep Card.
It is worth emphasizing at the beginning that while this chapter focuses on perfectly
competitive markets, the next ones will bring light to monopoly, monopolistic
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competition, and oligopoly, as well as the differences and similarities between the
different market structures.
A good analogy to price taking in the competitive model is gambling in Las Vegas or
at a horseracing track. A gambler must take the odds and rules of a casino or track as
given, then try to do the best he can under those rules and the “prices” represented by
the odds.
Emphasize how the perfectly competitive firm’s horizontal demand curve is
consistent with a downward sloping market demand curve.
Emphasize that while perfectly competitive firms are price takers, there is no
implication that prices are stable. In such markets, the market clearing price changes
with any change in the determinants of supply or demand, and there price changes
will change the individual demand curve faced by each producer.
Emphasize that the marginal revenue equals marginal cost profit maximization rule is
just an extension of the rule of rational choice (continue to do something until E[MB]
= E[MC]) to the case where the benefit is the price received from others.
It is important to emphasize that firms are in fact profit seekers, not profit
maximizers, in a world of uncertainty. In a world of certainty (i.e., the standard
models), these reduce to the same thing, but in the real world, we cannot ignore the
importance of uncertainty to real-world actions. For instance, imagine you are a price-
taking farmer, whose crop has a three-month growing season; the price you may
anticipate taking as given when you plant need not be the price you actually take as
given when you sell your crop later.
Make sure students understand the three-step method now because it will be used
again for other market models.
A good test of student understanding is to ask students what difference it would make
if the government imposed a tax of $1 per unit on just one price taker firm or if it
taxed all the firms in a perfectly competitive industry $1 per unit.
Emphasize that the zero-profit long-run equilibrium solution is based on free entry
(no barriers to entry), not on the fact that the firms are price takers. It should also be
noted that it is not just entry into an industry that drives economic profits to zero but
also that both entry and capitalization of the prices of inputs responsible for superior
performance together drive economic profits to zero. This is why farm price supports
don’t keep farmers’ profits high—profits are capitalized into the value of the
farmland and other specialized inputs.
Unskilled labor in a large city is a good example of a probable constant cost industry,
in contrast to markets for various kinds of skilled labor.
Note that in a constant-cost industry, firm cost curves end up in the same positions as
before once long-run equilibrium has been reestablished following a permanent
increased demand. Firm cost curves end up higher than before in an increasing cost
industry.
If you wish to use the PowerPoint slides, use the Chapter Outline to plan your
lecture.
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Chapter Outline
PowerPoint Slide 3 Perfect competition is a market structure characterized by (1) many buyers
A Perfectly and sellers, (2) identical (homogeneous) products, and (3) easy market entry
Competitive Market and exit.
Perfectly Competitive The best examples of perfectly competitive markets are highly organized
Markets: Examples markets for securities (such as stocks or bonds) and agricultural
commodities.
PowerPoint Slide 3
Easy Entry and Exit The perfect competition model is useful even though the assumptions may
be unrealistic. If a real-life market features very elastic demand curves and
relatively easy entry and exit, then that market resembles perfect
competition. Finally, the model provides a standard of comparison to
evaluate real-world markets.
PowerPoint Slide 4
An Individual Firm’s
Demand Curve
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Each producer is so small that it has no effect on the market price. An
PowerPoint Slide 5 individual firm can sell as much as it wishes to place on the market at the
Exhibit 7.1 prevailing price. The individual firm’s demand is perfectly elastic at the
market price. This means that the firm’s demand curve is horizontal at the
PowerPoint Slide 6 market price over the entire range of possible output.
A Change in Market
Price and the Firm’s Ex. 7.1 – Market and Individual Firm Demand Curves in a Perfectly
Demand Curve Competitive Market
Just because the perfectly competitive price is given does not mean it is
constant. Every time that there is a change in the market equilibrium price,
PowerPoint Slide 7 there will be a change in the position or height of the firm’s horizontal
Exhibit 7.2 demand curve. Sellers are provided with current information about market
demand and supply conditions as a result of price changes. Ultimately,
however, individual buyers and sellers only have to know the price of the
good they buy or sell.
Ex. 7.2 – Market Prices and the Position of a Firm’s Demand Curve
PowerPoint Slide 8 The firm’s objective is to produce the amount that maximizes profits: the
Profit Maximization difference between its total revenues and total costs.
In perfect competition, marginal revenue, average revenue, and price are all
PowerPoint Slide 9 equal: P = MR = AR.
Average Revenue,
Marginal Revenue,
and Price
Ex. 7.3 – Revenues for a Perfectly Competitive Firm
PowerPoint Slide 10
Exhibit 7.3
C. How Do Firms Maximize Profits?
PowerPoint Slide 11
How Do Firms The firm will maximize its profits at the level of output that maximizes the
Maximize Profits? difference between total revenue and total cost, which is at the same output
level at which marginal revenue equals marginal cost.
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D. Equating Marginal Revenue and Marginal Cost
PowerPoint Slide 11
Equating Marginal When MR > MC, the expansion of output creates additional profits. When
Revenue and MC > MR, the expansion of output decreases profits.
Marginal Cost
The profit-maximizing level of output means that a firm should always
The Profit- produce at the output level at which MR = MC. Be careful to avoid making
Maximizing Level of the mistake of focusing on per unit rather than total profit.
Output
Ex. 7.4 – Finding the Profit-Maximizing Level of Output
PowerPoint Slide 12
Exhibit 7.4
If MR > MC, a firm should increase production to increase profits. If MC >
PowerPoint Slide 13 MR, a firm should decrease production to increase profits. It follows that to
The Profit- maximize profits, a firm should produce the quantity where MR = MC.
Maximizing Level of
Output
Ex. 7.5 – Cost and Revenue Calculations for a Perfectly Competitive Firm
PowerPoint Slide 14
Exhibit 7.5
PowerPoint Slides (1) Where MR = MC, find q*, the profit-maximizing output level. (2) From
15–16 q*, find P* on the demand curve. Having q* and P* enables deriving TR. (3)
The Three-Step From q*, find ATC on the ATC curve. Having q* and ATC enables deriving
Method TC. If TR > TC, the form is generating economic profits. If TR < TC, the
firm is generating economic losses. If TR = TC, there are zero economic
profits, or a normal rate of return.
The Three-Step Alternatively, (P* − ATC) q* = total economic profit. At zero economic
Method profits, the owners are doing as well as they could elsewhere, in that they are
getting the normal rate of return on the resources they invested in the firm.
PowerPoint Slide 17 Ex. 7.6 – Short-Run Profits, Losses, and Zero Economic Profits
Exhibit 7.6
PowerPoint Slide 19 At price levels greater than or equal to AVC, a firm may continue to operate
Operating at a Loss in the short run even if ATC are not completely covered. To shut down
would make this firm worse off because it can cover at least some of its
fixed costs with the excess of revenue over its variable costs.
PowerPoint Slide 19 When the price is below AVC at all ranges of output, the firm is unable to
The Decision to Shut cover even its variable costs in the short run. It is more logical for this firm
Down to cease operations.
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PowerPoint Slide 20 Ex. 7.7 – Short-Run Losses: Price above AVC but below ATC
Exhibit 7.7
PowerPoint Slide 22 The short-run supply curve is the portion of the MC curve above the
The Short-Run minimum of the AVC curve. As a cost relation, the MC curve above
Supply Curve minimum AVC shows the marginal cost of producing any given output. As a
supply curve, the MC curve above minimum AVC shows the equilibrium
output that the firm will supply at various prices in the short run. The firm
will supply larger amounts only at higher prices.
The shut-down point is at the minimum point on the AVC curve.
PowerPoint Slide 25 Ex. 7.10 – Lei-Ann’s Daily Revenue and Cost Schedule
Exhibit 7.10
PowerPoint Slide 27 Ex. 7.11 – Deriving the Short-Run Market Supply Curve
Exhibit 7.11
PowerPoint Slide 29 A. Economic Profits and Losses Disappear in the Long Run
Long-Run
Equilibrium Economic profits in the short run motivate entry in the long run. Industry
supply increases and market equilibrium price declines. Economic profits are
reduced to zero. Each firm earns a normal return on the use of its capital.
PowerPoint Slide 31 Economic losses in the short run motivate exit in the long run. Industry
Long-Run supply decreases and market equilibrium price rises. Economic losses reach
Equilibrium zero. Only at zero economic profits there is no tendency for firms to either
enter or leave the market in the long run.
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Because the MR curve is also the AR curve, average revenues and average
total costs are equal at the equilibrium point. In addition, ATC is at its
PowerPoint Slide 34 minimum.
Exhibits 7.15
Ex. 7.15 – The Long-Run Competitive Equilibrium
PowerPoint Slide 35 When the output of an entire industry changes, the likelihood is greater that
Long-Run Supply changes in costs will occur. The shape of the long-run supply curve depends
on the extent to which input costs change when there is entry or exit of firms
in the industry.
PowerPoint Slides Ex. 7.16 parts a-c – Demand Increase in a Constant-Cost Industry
37–39
Exhibit 7.16 parts a–c
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Key Terms
increasing-cost industry
Key Formulae
The Student Review Card Deck has a card devoted to the key economic formulae covered
in this text. The following are the key formulae in Chapter 7:
You can use the following questions and exercises to work with students as part of
your in-class discussion. You might also use them as an in-class quiz or give them to
students as an independent homework assignment.
Class Exercises
1. Industry councils promote the consumption of particular types of farm products.
These groups urge us to “Drink Milk” or “Eat Apples.” Very little advertising is
done by individual farmers. Using your understanding of the perfectly
competitive market, explain this advertising strategy.
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Answer: Farms can be thought of as perfectly competitive businesses, which
produce products that are very close to perfect substitutes. For example, one
farmer’s eggs are very good substitutes for any other eggs. Any advertising
for eggs will increase the market demand for all farmers’ eggs. All farms will
benefit since the market price will rise. In this situation, no single farm has
an incentive to invest in advertising since the price it can charge will increase
and it will benefit from the advertising of others.
2. Explain why the following conditions are typical under perfect competition in the
long run:
a. P = MC
b. P = minimum ATC
Answers:
a. Firms maximize profits (minimize losses) by choosing output where
marginal revenue equals marginal cost. Profit is also therefore maximized
where the price equals marginal cost, because the marginal revenue of a
perfectly competitive firm equals the price. Profit-maximizing firms will
choose output where P = MC, both in the short run and the long run.
b. In the long run, when all inputs can be varied and firms are able to freely
enter and exit an industry, perfectly competitive firms will earn a normal
profit. All short-run economic profits (losses) are dissipated as new firms
enter (exit) the industry. Firms earn a normal profit when P = minimum
LRAC.
Answers:
a. Price must cover AVC or firms will lose more by operating than by
shutting down. Producing output when the price is less than average
variable cost will cause firms to lose not only their fixed costs, but also a
fraction of their variable costs. By shutting down when average variable
cost exceeds price, firms can limit their losses to their fixed costs.
b. Loss-minimizing (profit-maximizing) firms will continue to operate in the
short-run if price exceeds average variable cost. By continuing to operate,
firms can cover their variable costs, as well as a portion of their fixed
costs. If they were to shut down, firms would suffer losses equal to the
total dollar amount of their fixed costs.
c. In the short-run, when not all factors of production can be varied, a firm
can receive a price in excess of average total cost and thereby earn
economic profits. Price cannot exceed average total cost in a perfectly
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98
competitive market in the long run, however, when all factors of
production can be varied. In the long run, new firms have sufficient time
to enter the industry and established firms can more readily expand
output. New entry will occur until the market price falls to the level of
average total cost and economic profits are eliminated.
5. Describe what would happen to the industry supply curve and the economic
profits of the firms in a perfectly competitive industry if those firms were
currently earning economic profits. What if they were currently earning economic
losses?
Answer: If firms are currently earning economic profits, that will attract
entry into the industry in the long run, shifting the industry supply curve to
the right. That will lower the price and reduce economic profits until they are
zero in the long run. If firms are currently earning economic losses, firms
will exit the industry in the long run, shifting the industry supply curve to the
left. That will raise the price and reduce economic losses until they are zero
in the long run.
Note: Problem 6 might alternately be used for additional examples of the given
concepts.
6. Given the industry description, identify each of the following as an increasing- or
constant-cost industry:
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99
a. Major League Baseball: Uses the majority of pitchers. As the number of
pitchers used increases, the quality declines.
b. Fast-food restaurants: Uses a relatively small share of land and unskilled labor
in most cities.
c. Trucking industry: Uses a large portion of the trained and experienced drivers,
especially long-distance drivers.
Answers:
a. Increasing costs because more teams will bid up the price of good pitchers
and reduce the quality of the average pitcher.
b. Constant cost because expansion of output will not significantly increase
the price of these unspecialized inputs.
c. Increasing costs because industry expansion will put upward pressure on
the wages offered to these trained workers.
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100
Another random document with
no related content on Scribd:
ainoasti muuttavat toiseen paikkaan ja toiseen olomuotoon; he
siirtyvät samassa uuteen elämään kaikkine lahjoineen ja tunteineen;
yhä edelleen ovat he samoja eläviä, ajattelevia, toimivia olennoita,
kuin he olivat täällä maan päällä. ‒ ‒Lepoa he saavat — ja lepoa he
tahtovat, jos he lepoa tarvitsevat. Mutta mikä on heidän leponsa? Ei
työn puutetta, vaan mielen lepoa. Tosi lepoa on saada levätä
synnistä, surusta, pelosta, epäilyksestä, murheesta — ennen
kaikkea saada levätä pahimmasta uupumuksesta, nim. siitä että
tietää velvollisuutensa eikä kykene sitä täyttämään. Se on totinen
lepo — Jumalan lepo, joka aina tekee työtä ja aina lepää; samoin
kuin tähdet päämme päällä aina liikkuvat, tuhansia peninkulmia
päivässä, ja kuitenkin aina täydellisesti lepäävät; sillä ne liikkuvat
määrätyssä järjestyksessä, sopusointuisesti ja täyttävät sitä lakia,
jonka Jumala on niille antanut. Täydellinen lepo täydellisessä työssä,
se on varmaankin autuaitten henkien lepo, kunnes kaikkien
kappalten täydellinen suoritus tapahtuu, kun Kristus saapi valittuinsa
luvun täyteen. Ja jos näin on, mikä lohdutus meille, jotka olemme
kuolevat, ja mikä lohdutus meille, jotka olemme nähneet toisten
kuolevan, jos kuolema vain on uusi syntyminen korkeampaan
elämään ja jos kaikki, mikä meissä muuttuu, on ruumista — joka on
meidän kotelo eli kuori — se on samallainen muutos kuin simpukalla,
joka heittää pois vanhan nahkansa ja tulee ulos terveenä ja iloisena,
taikka kuin matelevalla toukalla, joka murtautuu vankeudestaan eli
kotelostaan ja levittää siipensä päiväpaisteessa kuin sievä kesälintu.
Missä on siis kuoleman oka, jos ei kuolema voi vahingoittaa,
myrkyttää tai turmella mitään siitä, jonka tähden ystävämme
rakastavat meitä; ei mitään siitä, jolla me voisimme palvella Jumalaa
tai ihmisiä? Missä on haudan voitto, kun se ei voi painaa meitä alas,
vaan päinvastoin vapauttaa meidät juuri siitä, mikä painaa meitä —
nim. kuolevaisesta ruumiista?
Water of Life — Sermons.
Essaya.
VII.
RUKOUS SYVYYDESTÄ.
»Silloin kun minä Sinua avukseni huudan, niin Sinä kuulet minua,
ja
annat minun sielulleni suuren väkevyyden.» Ps. 138:3.
Westminster Sermons.
Westminster Sermons.
Westminster Sermons.
Westminster Sermons.
Westminster Sermons.
VIII.
RUKOUKSIA JA TUNNUSTUKSIA.
Totisesta ihanuudesta.
Puhtaudesta ja hyvyydestä.
Oi Jumala, Sinä olet hyvä, vaan minä olen paha; juuri siitä syystä
tulen minä luoksesi. Minä tulen, että minut tehtäisiin hyväksi. Minä
ihailen Sinun hyvyyttäsi, ja minä halajan saada sen omakseni, vaan
minä en sitä taida, ellet Sinä auta minua. Puhdista minua, tee minut
puhtaaksi. Puhdista minut salaisista virheistäni ja istuta minun
sisimpääni totuus. Tee minun kanssani, mitä tahdot. Kasvata minua
niinkuin tahdot. Rankaise minua, jos se on välttämätöntä. Tee minut
ainoastaan hyväksi. Amen.
Sielun rauhasta.
Synnintunnustus.
Isä, minä olen syntiä tehnyt Sinua vastaan enkä ansaitse enää
Sinun lapsesi nimeä; mutta minä tulen Sinun luoksesi. Isä, minä
vihaan itseäni; vaan Sinä rakastat minua. Minä en ymmärrä itseäni,
vaan Sinä ymmärrät; ja Sinä tahdot olla armollinen Sinun omia
kättesi töitä kohtaan. Minä en voi johtaa ja auttaa itseäni, vaan sinä
voit auttaa minua, ja Sinä sen tahdotkin, koska Sinä olet minun Isäni,
eikä mikään voi eroittaa minua Sinun rakkaudestasi, tai Sinun
Poikasi, minun Kuninkaani rakkaudesta. Minä tulen ja pyydän päästä
osalliseksi Sinusta, juuri sentähden ettei minulla mitään ole enkä
mitään voi antaa Sinulle, vaan makaan Sinun ovellasi kuin
kerjäläinen, täynnä haavoja, haluten saada ravintoa muruista Sinun
pöydältäsi. Ja jos minä mielelläni tahdon auttaa kurjia, kuinka paljoa
enempi Sinä tahdotkaan auttaa minua. Sinun nimesi on rakkaus, ja
Sinun ihanuutesi on Sinun Poikasi Jesuksen Kristuksen kaltaisuus,
joka sanoi: »Tulkaa Minun tyköni kaikki, jotka työtä teette ja olette
raskautetut, ja Minä tahdon teitä virvoittaa!» Mat. 11:28. »Jos te,
jotka pahat olette, taidatte hyviä lahjoja antaa teidän lapsillenne,
kuinka paljoa enempi teidän taivaallinen Isänne antaa Pyhän
Hengen sitä anoville.» Luk. 11:13. Amen.
Heikkouden tunnustus.
Oi Jumala, minun Isäni, minä olen Sinun; pelasta minut, sillä minä
olen etsinyt Sinun käskyjäsi. Minä olen Sinun — en ainoasti Sinun
luomasi, oi Jumala — niin ovat myöskin linnut, hyönteiset ja
kukkaset, ja ne tekevät velvollisuutensa paljoa paremmin kuin minä
teen, Jumala sen mulle suokoon anteeksi.