Question

please answer each part and dont forget to put what part are you solving in each question

1. Consider the market for electric cars in 2011 in long-run equilibrium before Tesla launched the Model S. a. Draw the long-run optimal mix (130-quant and iso-cost) and short-run per unit cost curves and indicate the optimal L,K, C, 9., and p, on the graphs you have drawn. b. The overall demand for electric cars began to grow soon after the launch of the Model S. Illustrate a new short- run equilibrium on your graphs assuming the growth in demand pushed up the price for electric ve how the optimal L, K, C.9., and p, would change in the short-run on the graphs you have drawn. c. Discuss how you think the market would adjust in the long-run to this short-run change (you do not need to draw this the graph would likely get too messy). Discuss how the optimal L,K,C.., and p, would likely change

Answer 1

1. If capital and labor are the only factors, then an additional spending of $1 on capital while holding total cost constant will cost in the output loss from cutting back 1 worth of labor. This is MPL/PL.

If capital and labor are the only factors, then an additional spending of $1 on labor while holding total cost constant will cost in the output loss from cutting back 1 worth of capital. This is MPk/Pk. To know the marginal benefit of $1 spent on capital, we divide capital’s marginal product by its price: MPk/Pk

Optimal mix of any company can be given by-

                             MPL/PL=MPK/PK

where Pk is the price of capital which is rent (r) and Pl is the price of labor which is wage (w)

so it can be written as MPl/MPk = Pl/Pk or w/r

At this point, the firm will obtain the maximum output for a given total cost (refer diagram 1 and 2)

Short run equilibrium is achieved where MR=MC, then we extend the line till the demand curve to get equilibrium price. The area above the average total cost curve and below price is the profit. Profit is above ATC because it is the extra that we get after covering all the cost per unit. (refer diagram 3 and 4)

Optimum Total cost per unit that is ATC is that level at which profit is maximised given MC and MR.

F0H Isocosts aty of a to parte isoquants Oty of L oty of Li isocost - slope of sequent w asoquant slope of isoquant - MP Isocost Tc/ Pac L K L are eam/ optimum capital & labor resp MPK W Are Smc- Short un - Marginal cost ATC - Aug total cost Ave - Aseg variabele cost Qutput AFC - Aug fixed cost shaded part is the profit region 'Pla are eam puce e - aby ses pestereely MRAC Scanned with QMR thereare

2. The increase in demand for electric cars and price for the same have risen, we will now see the subsequent effect on isoquants isocosts and per unit cost curves.

And increase in demand for electric cars, will shift market demand to D1, increasing prices because supply is given. This increase in prices allows for profits to be made, at point 1. (refer fig. 5)

It is not specified in the question about the price of labour and capital but with the increase in demand the isoquant curve will shift outwards and the the price of labor and capital will also increase so isocost line will shift outwards till the equilibrium is achieved.

The isoquant will shift from q0 to q1 and accordingly isocost curve will shift to I1. The increase in wages and rent can be of same proportion or any one can increase more than the other (refer figure 6)

- q = ntn - quen P rofit 0 9. 12. Tecllcanned with CamScanner

3. 
   Demand ises and pu MC Ke XC Golett Or 70 "Is scanned with CamScanner 929
   For cost curves in the long run, as the profits increase more firms producing electric cars will try to enter the market which will force supply to the right going to an equilibrium where our firm will produce the exact same initial quantity as it was producing in the short run without increase in the demand. (refer 7)

In long run the price of cars increase and demand for the cars decline due to which the isoquant will return back to the initial position and so will the isocost curve. And isoquant will be tangent to the point where cost is minimum for a given level of output