Question

The market for apple pies is competitive and has the following demand schedule:

Price	Quantity Demanded
$7	600
8	500
9	400
10	300
11	200
12	100
13	0

Q	TFC	MC	TC	ATC
1	$9	$2
2	9	4
3	9	6
4	9	8
5	9	10
6	9	12

a. When P = $11, how many pies does each producer make? [Hint: Find MR. Use the profit maximization rule: MR = MC. Firms never choose the quantity such that MR < MC. Or, you can directly compute profit for each quantity.]

b. How many producers are there? How much profit does each producer earn? [Hint: To get the number of producers in the market, use the relationship between market quantity and the quantity produced by each firm. Because we assume all firms are identical, firms are producing the same quantity.]

Long-run equilibrium

c. In the long-run, there is free entry and exit process. How much profit does each producer earn in the long-run equilibrium? Why?

d. What are the market price and the number of pies each producer makes? How many pies are sold? [Hint: Use the condition for the market price in the long-run. Next, note that once the market price is determined, each seller’s quantity is determined by the above table.]

e. How many producers are operating in the long-run? Is the number of sellers larger than that in the short-run? Why?

Answer 1

a).

Consider the given problem here market for apple pies is competitive, => individual firm will take the price as given and determine the profit maximizing output. Here the market price is $11, => MR=$11. The profit maximizing level of production is “Q=5 units” where “MR = $11 > MC=$10”.

So, the profit of the firm is given by, => A = TR – TC = P*Q – 51 = 11*5 – 51 = $4. So, at the equilibrium each firm is producing 5 units and is getting $4.

b).

We have also given the demand schedule, => for “P=$11” the market quantity is “Q = 200 units” and each firm is producing 6 units, => the numbers of firms in to the industry “n = Q/q = 200/5 = 40 firms.

c).

In the LR new firms will enter into and will continue to enter until the profit earn by each firm is zero, => in the LR the price must be equal to “P=ATC”. So, the LR price is “P=ATC=7” and the corresponding quantity is “q=3 units”.

Here all the firm produce 3 units and earn zero economic profit.

d).

The market price is “P=$7=ATC”, => the market quantity is “Q = 600 units”, => the number of firm is “Q/q = 600/3 = 200 units.