1. Show graphically the price that would yield exactly zero in economic profits to a firm in the short run. With the price, why are profits maximized even though they are zero?
2. Wildcat John owns a few low-quality oil wells in Hawaii. He was heard complaining recently about the low price of crude oil: “with $50 per barrel price, I can’t make any money-it costs me $70 per barrel just to run my oil pumps. Still, I only paid $1 an acre for my land many years ago, so I think just stop pumping for a time and wait for price to get above $70.” What do you make of John’s production decisions?
3. A certain economics professor earns royalties from his textbook that are specified as 12 percent of the book’s total revenues. Assuming that the demand curve for this text is a downward-sloping straight line, how many copies of this book would the professor wish his or her publisher to sell? Is this the same number that the publisher itself would want to sell?
4. What kind of demand curve does a price-taking firm face? For such a curve, what is the relationship between price and marginal revenue? Explain why an individual firm can be a price taker even though the entire market demand curve for its product may be downward-sloping.
5. Why do economists assume that firms seek maximum economic profits? Because accounting rules determine what the dollar value of profits actually is, why should firms be concerned with the economist’s concept of cost? Which notion of profits do you believe is most important to entrepreneurs who are considering starting a business?
6. Why do economist believe short-run marginal cost curves have positive slopes? Why does this belief lead to the notion that short-run supply curves have positive slopes? What kind of signal does a higher price send to a firm with increasing marginal costs? Would a reduction in output ever be the profit-maximizing response to an increase in price for a price-taking firm?