Question

1. Market and firm in short-run and long-run.

Suppose, instead of a permanent increase in income, there was a permanent decrease in income. Trace out the complete short-run and long-run impact using our 2 diagram market and firm analysis. Add a few sentences.

2. The Luxury Box.

Suppose a firm can sell 25 luxury boxes at $1,000,000 per box. In order to sell one more luxury box, it must lower its price to $950,000 per box and sell all 26 boxes at this new lower price.

1. What will happen to this firm’s revenue if it sells that extra box? Does it seem like a good idea?

2. What is the relationship between the price the good is sold for and the firm’s marginal revenue?

3. Can you explain your result in b? Why is the price setter different than the price taker?

Answer 1

(1) If instead of permanent increase in income, there is permanent decrease in income the whole consumption would decline in the economy in the short run as people do not have enough money to consume goods, AD shifts back to AD1 which raises the prices to P1 from P0 and reduce quantity level to Y1 from Y0. When in long run, suppliers get to know that there is not enough demand for goods in the market, they will produce less goods as inventory will rise if they will continue producing at this level, they will shift SRAS0 to SRAS1 which decreases the prices to its initial level and reduce quantity level to Y2.

(2) (1) If they sell 25 units in $25000000 and 26 units in 26 * 950000 = $2470000, which is not an profitable case for the company. They must focus on selling 25 units.

(2) (2) Marginal revenue is the revenue generated from the extra unit sold in the market. The price of the extra unit sold can completely change the marginal revenue. Assume a condition there is excess inventory reserve of a firms and they are willing to sell their quantity at any level of price above their cost. Assume the normal selling is $100 and they are ready top sell it at $55 which reduces the marginal revenue and assume another condition when they have huge demand for the produce and in this case they can charge $110 dollars too which can raise the marginal revenue.

(2) (3) A price setter is an entity that has the ability to set its own prices, because its products are sufficiently differentiated from those of competitors while a price taker is a person or company that has no control to dictate prices for a good or service.