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In A Society The Efficient Quantity Of

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BUSI 1023: INTRODUCTION TO ECONOMICS FOR MANAGERS
UNIT 10 EXERCISES
Question 1
50 points
Diagram 1
$Price or Unit
C
B
641
E
30
A
G
MC
MR
200
500 Quantity per week
In a society, the efficient quantity of public goods produced is determined in the same way as the
efficient quantity of production in a firm. That is, by comparing the marginal cost and marginal revenue
and producing at the point where they equal each other. In hiring workers, the efficient number of
workers to hire is at the point where the marginal revenue product (that is, price of product x no. of units
worker produces) of an extra worker is equal to the cost or wage of that worker. To put it simply, if you
pay a worker $100 per day (the Marginal Cost), once that worker continues to bring in revenue
(Marginal Revenue) that exceeds his wage per day, you may continue to hire more workers. The optimal
point is when the wage (or MC) – revenue (or MR). Note that MC = MR is an optimal point of
efficiency, and when Price – MC, this yields the most benefit to society. Let’s take a look at the effect of
these factors in competitive versus monopoly situation and answer the following questions.
a. In Diagram 1 above, suppose the industry is a competitive one. What would be the price charged
and quantity exchanged? Explain how you derived your answer.
b. Now, assume Diagram 1 represents an industry that is a monopoly. What would be the prevailing
price and quantity exchanged? Explain.
c. Assume Diagram 1 represents an industry that is a monopoly. What would be the profit per
week? Show your calculations.
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