Question

1) Consider the figure below. FIGURE 32 Self-Reinforcing Effects and Clustering Total cost labor cos Prop cost Number of firms in cluster Profit of fimm cincter Imagine that there is a $3 per unit fall in labor costs show that change on each of the graphs above Label the points and put in the numbers. See og 50-52

It's pretty much just that pages discussing the graphs and explaining their meaning. would you like to see my notes? They're pretty similar to the graph. I wrote down my answer but I'm still pretty confused on it.

Answer 1

As per the given information Total Revenue ( TR ) of the movie producer =$82.

This is fixed and consists of -

TR = Labour costs+ Props cost+ Profit

So when it is a one firm cluster, labour cost =$12, Props cost=$62 ;

.•. Profit = 82-(62+10) =$10. This is shown as point a in the figure.

Also profit is maximized (at $28 shown in middle panel of figure 3-2 and Total cost is minimized at $ 54) when no. of firms in cluster =2 .

With same Total Revenue of $82 , at profit maximizing level ,

Labour costs = 24.

Note: If you look at the figure, labour cost curve is linear. This means the slope of this curve is constant. So if no. of firms =1 labour cost = 12, if no. of firms = 2, labour cost =24, if no. of firms =3, labour costs=36 and so on.

Here slope is constant i.e. $\frac{12}{1} ,\frac{24}{2} ,\frac{36}{3}=12$

So from TR equation, we can compute props cost at point b,

82 = 24 + props cost + 28

Props cost = 82-(24+28) =$ 30.

Now, as per the given problem, there is a $3/unit decrease in labour costs.

So now at point a, labour cost is $12-$3=$9. However we assume there is no change in props cost at any points.

So our total profit increases to $82-(9+62)= $13 at point a.Also profit at various point after fall in labour costs is summarized in the table below-

Points	Labour cost $	Props cost $	Total Cost	Profit $
a	9 (12-3)	60	69	13
b	18(24-6)	30	48	34
c	27(26-9)	20	47	35
e	45(60-15)	12	57	25

This is shown in image attached below. Here we find that profit gets maximized at point c ($35) and total cost gets minimized at point c as well.($47).

the below figure shows profit gap. Here profit gap is maximum at point c.

Total lost abour cost A- |---- . Props cast s7 No. of firms. wt 3 u Profit of the firm de (25) 1 2 3 H 5 No. of firms

22 Profit Gap E(12) हो र जिल्ला