Exercise
Consider the following demand & supply functions for a market
of chocolate.
𝑄 = 300 + 1400𝑃
𝑄 = 2400 − 700𝑃 &
1. Find out the market clearing price & quantity for chocolate.
2. Calculate the maximum possible CS, PS, TS in this market.
3. Calculate the shortage/surplus, change in CS, PS, TS when:
a) Govt imposes a price ceiling at $0.6
b) Govt imposes a price flooring at $1.5
c) Legal maximum price is $2
↓ .
Here
, GD = 2400-7oop ①
Try GS
Yourself
300 1400P = + ⑪
: D =
GS
• Similarly a ‘not binding’/ineffective
100P
price ceiling can become
=> 2400 700p =300 +
‘binding’/effective when demand rises.
-
=> 2100p = 2100
• A ‘not
: binding’
P =1 price flooring can become ‘binding’ when
supply rises or when demand falls.
: = 300 + 100X1
= 1708
Market
clearing price 1$ market
clearing quantity 1700
=
: =
,
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Exercise
Supply & Demand functions for a market of T-shirt are given by:
𝑄 = 2(𝑃 − 30)
𝑄 = 300 − 𝑃
1. Find out the market clearing price & quantity of T-shirt.
2. Calculate the CS, PS, TS from this market.
3. Calculate the shortage/surplus & new CS, PS, TS when:
a) Legal maximum price is fixed at $80
b) Legal minimum price is fixed at $150
c) Price flooring is imposed at $100
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Cost Equations
Product A: 𝑻𝑪 = 𝑸𝟐 + 𝟑𝟎𝑸 + 𝟗𝟎𝟎
Product B: 𝑻𝑪 = 𝑸𝟑 − 𝟔𝑸𝟐 + 𝟐𝟒𝟎𝑸 + 𝟕𝟓𝟎
i. From the cost functions given above find out the functions
for VC,FC,AVC,AFC,ATC & MC for the respective products.
ii. At which production quantity average total cost will be
minimum & how much will that minimum average cost be?
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Try Yourself
• Similarly a ‘not binding’/ineffective price ceiling can become
‘binding’/effective when demand rises.
• A ‘not binding’ price flooring can become ‘binding’ when
supply rises or when demand falls.
Exercise
Market Demand of potato: 𝑷 𝑸 = 𝟖𝟎 − 𝟎. 𝟓𝑸
Market Supply of Potato: 𝑷 (𝑸) = 𝟎. 𝟓𝑸 + 𝟑𝟓
Total cost of ‘X’ Potato firm : 𝑪 𝑸 = 𝟏𝟕. 𝟓𝑸 + 𝟐. 𝟓𝑸𝟐 + 𝟏𝟔𝟎
• Considering market of Potato as perfectly competitive,
answer the following questions using the equations given
above.
Exercise
• Calculate the profit maximizing quantity for firm ‘X’. If the firm is
producing 10 units of potato, find out whether it should increase or
decrease production.
• Calculate ‘X’ firm’s profit. Determine whether it is earning
positive/negative/zero economic profit in short run.
• If fixed cost is 300, should this firm shut down in short run? Should
it exit in long run?
• Would new firms enter in this market if there was no fixed cost?
Explain how firms in this market will eventually earn 0 economic
profit in the long run. Draw necessary diagrams.
Case - 2
Profit maximizing quantity is 40 (because P=MC is at Q=40)
If the firm stays operational (Q=40), If the firm shuts down (Q=0),
TR = $ 15 × 40 = $ 600 ;[P=15] TR = $ 15 × 0 = $ 0
TC = $ 25 × 40 = $ 1000 ;[ATC=25] VC = $ 20 × 0 = $ 0
VC = $ 20 × 40 = $ 800 ;[AVC=20] FC = $ 200 (sunk cost)
FC = (1000-800) = $ 200 TC = $ 200 (VC+FC)
Loss = (1000-600) = $ 400 Loss = (200-0) = $ 200
In this case, staying operational creates greater loss. So, the firm
should shut down to cut off excessive variable cost.
Case - 2
Profit maximizing quantity is 40 (because P=MC is at Q=40)
If the firm stays operational (Q=40), If the firm shuts down (Q=0),
TR = $ 15 × 40 = $ 600 ;[P=15] TR = $ 15 × 0 = $ 0
TC = $ 25 × 40 = $ 1000 ;[ATC=25] VC = $ 20 × 0 = $ 0
VC = $ 20 × 40 = $ 800 ;[AVC=20] FC = $ 200 (sunk cost)
FC = (1000-800) = $ 200 TC = $ 200 (VC+FC)
Loss = (1000-600) = $ 400 Loss = (200-0) = $ 200
In this case, staying operational creates greater loss. So, the firm
should shut down to cut off excessive variable cost.
Case - 2
Profit maximizing quantity is 40 (because P=MC is at Q=40)
If the firm stays operational (Q=40), If the firm shuts down (Q=0),
TR = $ 15 × 40 = $ 600 ;[P=15] TR = $ 15 × 0 = $ 0
TC = $ 25 × 40 = $ 1000 ;[ATC=25] VC = $ 20 × 0 = $ 0
VC = $ 20 × 40 = $ 800 ;[AVC=20] FC = $ 200 (sunk cost)
FC = (1000-800) = $ 200 TC = $ 200 (VC+FC)
Loss = (1000-600) = $ 400 Loss = (200-0) = $ 200
In this case, staying operational creates greater loss. So, the firm
should shut down to cut off excessive variable cost.
Case - 2
Profit maximizing quantity is 40 (because P=MC is at Q=40)
If the firm stays operational (Q=40), If the firm shuts down (Q=0),
TR = $ 15 × 40 = $ 600 ;[P=15] TR = $ 15 × 0 = $ 0
TC = $ 25 × 40 = $ 1000 ;[ATC=25] VC = $ 20 × 0 = $ 0
VC = $ 20 × 40 = $ 800 ;[AVC=20] FC = $ 200 (sunk cost)
FC = (1000-800) = $ 200 TC = $ 200 (VC+FC)
Loss = (1000-600) = $ 400 Loss = (200-0) = $ 200
In this case, staying operational creates greater loss. So, the firm
should shut down to cut off excessive variable cost.
Exercise
Demand of a monopoly: 𝑷 (𝑸) = 𝟏𝟔 − 𝑸
Total cost of the monopoly: 𝑪 (𝑸) = 𝟏𝟎𝟎 − 𝟏𝟐𝑸 + 𝑸𝟐
• Calculate the profit maximizing quantity for this monopoly.
• Calculate the revenue maximizing quantity
• What would have been the efficient quantity for the society?
• Calculate the deadweight loss generated by this monopoly.
Case - 2
Profit maximizing quantity is 40 (because P=MC is at Q=40)
If the firm stays operational (Q=40), If the firm shuts down (Q=0),
TR = $ 15 × 40 = $ 600 ;[P=15] TR = $ 15 × 0 = $ 0
TC = $ 25 × 40 = $ 1000 ;[ATC=25] VC = $ 20 × 0 = $ 0
VC = $ 20 × 40 = $ 800 ;[AVC=20] FC = $ 200 (sunk cost)
FC = (1000-800) = $ 200 TC = $ 200 (VC+FC)
Loss = (1000-600) = $ 400 Loss = (200-0) = $ 200
In this case, staying operational creates greater loss. So, the firm
should shut down to cut off excessive variable cost.
Case - 2
Profit maximizing quantity is 40 (because P=MC is at Q=40)
If the firm stays operational (Q=40), If the firm shuts down (Q=0),
TR = $ 15 × 40 = $ 600 ;[P=15] TR = $ 15 × 0 = $ 0
TC = $ 25 × 40 = $ 1000 ;[ATC=25] VC = $ 20 × 0 = $ 0
VC = $ 20 × 40 = $ 800 ;[AVC=20] FC = $ 200 (sunk cost)
FC = (1000-800) = $ 200 TC = $ 200 (VC+FC)
Loss = (1000-600) = $ 400 Loss = (200-0) = $ 200
In this case, staying operational creates greater loss. So, the firm
should shut down to cut off excessive variable cost.
Case - 2
Profit maximizing quantity is 40 (because P=MC is at Q=40)
If the firm stays operational (Q=40), If the firm shuts down (Q=0),
TR = $ 15 × 40 = $ 600 ;[P=15] TR = $ 15 × 0 = $ 0
TC = $ 25 × 40 = $ 1000 ;[ATC=25] VC = $ 20 × 0 = $ 0
VC = $ 20 × 40 = $ 800 ;[AVC=20] FC = $ 200 (sunk cost)
FC = (1000-800) = $ 200 TC = $ 200 (VC+FC)
Loss = (1000-600) = $ 400 Loss = (200-0) = $ 200
In this case, staying operational creates greater loss. So, the firm
should shut down to cut off excessive variable cost.
Payoff Matrix of Prisoner’s Dilemma
Babul’s Decision
Abul’s Decision Confess Silent
Confess (8 Y, 8 Y) (0 Y, 20 Y)
Silent (20 Y, 0 Y) (1 Y, 1 Y)
Prisoner’s Dilemma in Arm’s Race
Decision of USA
Arm Disarm
Decision of Russia
(Safe & Powerful,
Arm (At Risk, At Risk)
At Risk & Weak)
(At Risk & Weak,
Disarm Safe & Powerful)
(Safe, Safe)
Prisoner’s Dilemma in a Water Duopoly
Kamal’s Decision
40 Gallons 30 Gallons
Jamal’s Decision
40
($ 1600, $ 1600) ($ 2000, $ 1500)
Gallons
30
($ 1500, $ 2000) ($ 1800, $ 1800)
Gallons
Prisoner’s Dilemma in an Oil Duopoly
Exxon Mobil’s Decision
Chevron’s Decision Drill 1 Well Drill 2 Wells
Drill 1
($ 5M, $ 5M) ($ 3M, $ 6M)
Well
Drill 2
($ 6M, $ 3M) ($ 4M, $ 4M)
Wells
Advertising Game – No Dominant Strategy
Firm - B’s Decision
Advertise Doesn’t Advertise
Firm - A’s Decision
Advertise ($ 10000, $ 5000) ($ 15000, $ 0)
Doesn’t
($ 6000 , $ 8000) ($ 20000, $ 10000)
Advertise
Advertising Game – No Dominant Strategy
Firm - B’s Decision
Advertise Doesn’t Advertise
Firm - A’s Decision
Advertise ($ 10000, $ 5000) ($ 15000, $ 0)
Doesn’t
($ 6000 , $ 8000) ($ 20000, $ 10000)
Advertise
Sample Game
Player 2
Choice A Choice B
Choice A (1 , 4) (2 , 3)
Player 1
Choice B (3 , 1) (4 , 2)