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3 Feb 2018

Explain what occurs when a new technology makes another one obsolete in terms of economic profit. Consider firm A to be an existing firm using the old technology. Firm B is the new firm with the new technology. Firm A earned positive profits for years, but with the entrance of Firm B, Firm A's goods and services are no longer desired.

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Related questions

1-7 True or False

1) In the short run, a perfectly competitive firm can earn positive, zero, or negative profit depending on the market price of the firm's output.

2)In the model of the perfectly competitive firm, the firm's fixed costs are equal to its implicit costs of production.

3)Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output. In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

4)Assume that at the current level of output, price equals marginal revenue, but is less than average total cost. So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

5)The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

6)Barriers to entry serve to limit the number of firms that operate in a particular market and, as 11) such, reduce the amount of total profit earned in the market.

7)In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.

14-17 Multiple Choice

14) Marginal revenue is equal to:
A) the change in P x Q due to a one unit change in output. B) the change in quantity divided by the change in price.

C) the change in price divided by the change in output. D) price, but only if the firm is a price searcher.

15) In order to maximize its profits, a price-taking firm should produce the level of output at which:

A) marginal revenue = marginal cost. B) total revenue = total cost.

C) variable revenue = variable cost. D) average revenue = average cost.

16) Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:

A) cannot be determined with the information given. B) no change in the firm's economic profit.
C) a decrease in the firm's economic profit. D) an increase in the firm's economic profit.

17) Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:

A) incurring an economic loss. B) earning a positive economic profit.

C) earning economic profit = 0. D) breaking even.

Consider a representative firm that produces using capital (K) and labor (N), but that owns no capital. The firm can hire workers in the labor market at a wage w and can rent capital market at a rental rate r (that is, the firm can rent K units of capital for which it would have to pay rK). The production function of the firm is given by zF (K, N) where: F (K, N) = KaN B and a + B < 1.

a) (2 points) Does the technology exhibit constant returns to scale? If not does it exhibit increasing returns, decreasing returns, or neither?

b) (2 points) Pose the profit maximization problem of the firm.

c) (2 points) Find the firm's optimal capital and labor demand. Hint: You can combine the firm's FOC by taking their ratio (diving one by the other) to get the labor demand as a function of the capital. Then you can use this to replace the FOC to get the capital demand as a function of prices and parameters.

d) (2 points) Find the firm's optimal profits. Hint: Use the firm's FOC to replace for the prices (r and w), then replace for labor as a function of capital (that you found above) and finally replace for the optimal capital demand.

e) (2 points) What happens to the optimal profits when B = 1 - a?

Green Energy, Inc., is a manufacturer of wind turbines. In the annual meeting, the directors are discussing the next year's operation plans. With the country's GDP growing at an impressive pace, overall energy demand is expected to increase by 10 percent annually over the next few years. Wanda Hill, the Director of Sales, claims that the firm is already enjoying economies of scale and so should install new capacity and hire more workers to expand production. However, Edward Sanchez, the Managing Director of the firm, is not in favor of increasing capacity. He is of the opinion that the firm is currently operating at the minimum efficient scale and any further expansion will increase costs.

Which of the following, if true, will support Edward's view that the firm is currently operating at the minimum efficient scale?

a. The firm caters to just 5 percent of the market demand.

b. Latest data compiled by the Department of Energy reveals that the country's wind energy capacity increased by 5 gigawatt last year when two new wind farms became operational.

c. The firm's average cost of production remained unchanged over the last 100 units.

d. A rival firm experienced an increase in per-unit cost of production this year.

e. The government's expenditure on research and development in the fields of green technology has traditionally been high.

I know what "economies of scale" means, but I have no idea how to answer this question. I guessed "b," but that was wrong. Please explain like I'm five.

The next part of the question:

Which of the following are Wanda and Edward likely to agree with?

a. The per-unit cost of the firm is increasing at the currrent output level.

b. The marginal cost at the current production level is higher than the average cost.

c. The sale of wind turbines will increase if they can increase supply.

d. The firm currently has excess capacity.

e. Green Energy's profits are expected to fall in the near future.

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