Maximizing Profit

1. What is the value the household places on the first unit of output? – This is a marginal analysis question.
2. What is the value the household places on the second unit of output? – This is a marginal analysis question.
3. What is the value the household places on two units of output? This question is not the same as questions one and two.
4. What is the maximum amount the household will pay for the first unit of output? – This is a marginal analysis question. – This is not the same as the value of the first unit.
5. What is the maximum amount the household will pay for the second unit of output? – This is a marginal analysis question. – This is not the same as the value of the second unit.
6. If the price of each unit of output is $98.50, how many units of output will the household purchase?
7. What is the minimum amount the firm will accept for the first unit of output? – This is a marginal analysis question.
8. What is the maximum amount the firm will accept for the first unit of output? – This is a silly question.
9. What is the minimum amount the firm will accept for the second unit of output? – This is a marginal analysis question.
10. What is the cost to produce the first unit of output? – This is a marginal analysis question. – This is not the same as the minimum amount the firm will accept for the first unit.
11. What is the cost to produce the second unit of output? – This is a marginal analysis question. – This is not the same as the minimum amount the firm will accept for the second unit.
12. What is the condition that must be satisfied for the output market to be in equilibrium?
13. What is the equilibrium quantity demanded of output? – Just set the equations equal to each other and solve for quantity demanded and quantity supplied.
14. What is the equilibrium quantity supplied of output? – Remember, this is an equilibrium solution?
15. What is the equilibrium price of a unit of output?
16. What is the total value the household places on the equilibrium amount of output? – This is not what the household is willing to pay.
17. What is the amount of the household’s total expenditures on the equilibrium amount of output?
18. What is the firm’s total revenue from the sale of the equilibrium amount of output?
19. What is the firm’s total cost of production for the equilibrium amount of output?
20. Consider the new Demand Curve P = 200 – Q.
21. Does this new demand curve increase the quantity demanded?
22. Does this new demand curve increase demand?
23. Does this new demand curve increase supply?
24. Does this new demand curve increase the quantity supplied?
25. Consider the new supply curve P = 100 + Q.
26. Does this new supply curve increase the quantity supplied?
27. Does this new supply curve this increase supply?
28. Does this new supply curve increase demand?
29. Does this new supply curve increase the quantity demanded?
30. Does a decrease in supply increase or decrease consumer surplus?
31. Does an increase in demand increase or decrease consumer surplus?
32. What pricing policy will cause a shortage of output?
33. What pricing policy will cause a surplus of output?
34. What are the two behavioral entities we study in economics?
35. Which of these two entities’ behavior is described by the law of supply?
36. Which of these two entities’ behavior is described by the law of demand?

The following equation shows the relationship between the price of carrots, or any other output that you wish to use, and the quantity of carrots.

(1) P = 100 – Q

1. Is this a supply or demand curve?
2. How do you know?
3. Draw the demand or supply curve implied by the equation and label the intercept(s).
4. What is the slope of this curve?
5. What does the slope of this curve measure?

The following equation shows another relationship between the price of carrots and the quantity of carrots.

(1) P = Q

6. Is this a supply or demand curve?
7. How do you know?
8. Draw the demand or supply curve implied by the equation and label the intercept(s).
9. What is the slope of this curve?
10. What does the slope of this curve measure?
11. What are the coordinates of the equilibrium point implied by these curves?
12. Why is this solution only a “partial” equilibrium solution?
13. What is the total revenue at the equilibrium point?
14. What are the total expenditures at the equilibrium point?
15. What is the total cost at the equilibrium point?
16. What is the total profit at the equilibrium point?
17. What is the total benefit the consumers receive, not the amount they will pay, from the equilibrium quantity?
18. What is the consumer surplus at the equilibrium point?

Here is a new equation for carrots.

(1) P = 200 – Q

1. Is this an increase or decrease in supply?
2. What are the coordinates of the new equilibrium point?
3. What is the total revenue at the new equilibrium point?
4. What are the total expenditures at the new equilibrium point?
5. What is the total cost at the new equilibrium point?
6. What is the total profit at the new equilibrium point?
7. What is the total benefit the consumers receive, not the amount they will pay, from the new equilibrium quantity?
8. What is the consumer surplus at the new equilibrium point?
9. Do profits increase or decrease?
10. By what amount do profits increase or decrease?
11. Does consumer surplus increase or decrease?
12. By what amount does consumer surplus increase or decrease?
13. Does an increase in demand increase the welfare of households?
14. Does an increase in demand increase the welfare of firms?

Consider the following equation: P = 100 – Q

1. Is this a demand or a supply curve?
2. If P = 20, what is the value for Q?
3. What is the total benefit this consumer receives from 80 units of Q?
4. What in the total benefit this consumer receives from the eightieth unit of Q?
5. What is the maximum amount this consumer will pay for the eightieth unit of Q?

Consider the following equation: P = Q

6. Is this a demand or supply curve?
7. If P = 20, what is the value for Q?
8. What is the total cost of production for 20 units of Q?
9. What is the marginal cost to produce the twentieth unit of Q?
10. What is the minimum price the producer will accept for the twentieth unit of Q?

Use the equations to answer the following:

11. What are the coordinates of the equilibrium point?
12. Draw a graph – or use the graphs you drew above – of the equilibrium solution and label the equilibrium point.
13. What is total revenue at the equilibrium point?
14. What is total cost at the equilibrium point?
15. What is consumer surplus at the equilibrium point?
16. What is the profit at the equilibrium point?

Use the equations to answer the following:

17. If a per unit excise tax of $10 is levied on the producer does the demand or the supply curve shift?
18. Does the $10 excise tax cause a decrease in the quantity supplied or demanded?
19. Write the equation for the new demand or supply curve.
20. Draw the new demand or supply curve.
21. Find the new equilibrium point?
22. What is the amount of the excise tax collected?
23. Are consumers better off or worse off because of the excise tax?
24. Are firms better off or worse off because of the excise tax?

Yesterday I was shopping for my daughter’s birthday present. I walked into a women’s’ clothing store. A rack of sweaters was placed at the front of the store and on it was placed the following sign.
Buy 1 sweater – Pay $45 Buy 2 sweaters – Pay $65 Buy 3 sweaters – Pay $75

25. What is this firm’s marginal revenue from the sale of the first sweater?
26. What is this firm’s marginal revenue from the sale of the second sweater?
27. What is this firm’s marginal revenue from the sale of the third sweater?

Assume this firm maximizes profits

28. What is the minimum profit the firm earns on the sale of one sweater?
29. What is the minimum profit the firm earns on the sale of two sweaters?

Nucor Steel is a US manufacturer of specialty steel items. Nucor purchases stainless steel products from another US firm, Stainless Specialties (SS). Nucor Steel’s demand curve for the stainless steel products is P = 100 – Q. Stainless Specialties (SS) supply curve for the stainless steel products is P = Q.

1. What is the price of the stainless steel?
2. What is the Nucor’s quantity demanded for stainless steel?
3. What is SS’s quantity supplied of stainless steel?
4. What is Nucor’s total expenditure for stainless steel?
5. What is SS’s total revenue from the sale of stainless steel?
6. What is the total value Nucor places on the stainless steel purchased?
7. What is SS’s total cost to produce the stainless steel?
8. What is SS’s total profit from the sale of stainless steel?
9. What is Nucor’s consumer surplus from the stainless steel?
10. Suppose the US government imposes an excise tax of $10/unit on stainless steel products produced in the US.
    ● Does this tax increase or decrease Nucor’s demand for stainless steel?
    ● Does this tax increase or decrease SS’s supply of stainless steel?
    ● What is the price of the stainless steel?
    ● What is the quantity demanded of stainless steel?
    ● What is the Nucor’s total expenditure for stainless steel?
    ● What is SS’s total revenue from the sale of stainless steel?
    ● What is total excise tax collected?
    ● What is the total value Nucor places on the stainless steel purchased?
    ● What is SS’s total cost to produce the stainless steel?
    ● What is SS’s total profit from the sale of stainless steel?
    ● What is Nucor’s consumer surplus from the stainless steel?
    ● Is SS’s made better off or worse off as a result of the tax?
    ● Is Nucor better off or worse off as a result of the tax?
    ● Does the tax on US produced stainless steel harm both the US buyers and the US sellers of stainless steel?
    ● Suppose there was no US excise tax on stainless steel but Nucor could purchase the same stainless steel supplied by SS from a Korean firm for $40.
    ● What is the price Nucor will pay for stainless steel?
    ● What is the Nucor’s quantity demanded of stainless steel?
    ● What is quantity of stainless steel supplied by SS?
    ● What is the quantity of stainless steel supplied by the Korean firm?