Question

the 3 thinking economically questions

A production Creating and Interpreting Economic Models Economic models help solve problems by focusing on a limited set of variables. A costs and revenue schedule, which you learned about in Chapter 5, is a model that businesses decide how much to produce. Creating a graph as part of the model pain picture of the data that makes it easier to understand In this example, imagine you own a business that produces baseballs in a perfect competitive market. The market price of a baseball is 51, but your costs vary depending many you produce. Follow the instructions to create a graph that will help you visual way a perfectly competitive market works. depending on to you visualize the is of probuding CREATING AN ECONOMIC MODEL OF BASEBALL PRODUCTION 1. Copy the graph below onto your own paper, or use SMART Grapher Classzoner 2. Using data from the table below, plot the curve showing the marginal costs of pro different numbers of baseballs. Label the curve "MC. 3. Using data from the table below, plot the curve showing the marginal revenue of producing different numbers of baseballs. Label the curve "MR" Produced in dollars) BASEBALL PRODUCTION 1 2 BASEBALL PRODUCTION COSTS AND REVENUES SCHEDULE Total Total Total Cost Total Marginal Marginal Revenue Profit Revenue Cost (in dollars) (in dollars) (in dollars) (in dollars) 0 0.00 1.00 -1.00 1 .00 2.00 -1.00 1.00 1.00 2 .00 2.80 -0.80 1.00 0.80 3 3.00 3.50 -0.50 1.00 0.70 4.00 4.00 0.00 1.00 5.00 4.50 0.50 1.00 0.50 6.00 5.20 0.80 1.00 0.70 7.00 6.00 1.00 1.00 0.80 8.00 6.86 1.14 1.00 0.86 9 9.00 7.86 1.14 1 .00 1.00 10 10.00 9.36 0.64 1.00 1.50 11 11.00 11.50 -0.50 1.00 2 .14 Price per baseball (in dollars) 0.25 0 1 2 3 4 5 6 7 8 9 Quantity of baseballs THINKING ECONOMICALLY Analyzing 1. How many baseballs should you produce each day to maximize profits? 2. Using the same graph, plot the demand curve for this perfectly competitive market. Remember that the market price will not change no matter how many baseballs are demanded. 3. How does the graph help explain the term "price takers"?

Answer 1

The above question provides us a situation arising in a perfectly competitive market where the profit maximization happens when MC=MR. Also, in a perfectly competitive market the maximum profit can be determined by TR-TC= Profit.

1. The first question is on how many baseballs have to be produced each day to maximise our profits.  Looking at the table above we can see that MC=MR = 1 in two places on the graph. The first MC=MR=1 happens at 1 unit of baseball produced which is not economically viable as the MC falls at the 2^nd unit of baseball produced. Hence, from the table we can see that 9 unit of baseballs have to be produced to maximise profit daily as MC=MR=1$ and also after 9 units of baseball is produced MC starts increasing. Also, at the 9t^h unit we have maximum profit at 1.14$.

2.

2007 Price of poi baseball len collars) 1.75+ 1.507 1.25t 1.00 t 0.75 0:50 - MR = 1 = Dernand curve 0 1 2 3 4 5 6 7 8 9 10 Quantity of baseballs

3. The graph helps us to understand the concept of price takers as in a perfectly competitive market the products produced by all the firms will be same in all aspects. Given such a situation with homogenity of products the consumers aren't given any wide range of options to choose from. If in such a perfect market, one producer increases the price of his product, then the market price being the same at 1$, consumers would shift from that producer to another producer selling at P=1$. This way the producer who had increases the price would have to either exit the market or reduce the price to earlier level. This in short means that the producers in a perfectly competitive market are price takers who accept the market determined price for their product.