Question

In: Economics

The market for apple pies in the city of Ectenia is competitive and has the following...

The market for apple pies in the city of Ectenia is competitive and has the following demand schedule:

Demand Schedule

Price

Quantity Demanded

(Dollars)

(Pies)

1 1,200
2 1,100
3 1,000
4 900
5 800
6 700
7 600
8 500
9 400
10 300
11 200
12 100
13 0

Each producer in the market has a fixed cost of $6 and the following marginal cost:

Quantity

Marginal Cost

(Pies)

(Dollars)

1 1
2 3
3 8
4 10
5 12
6 14

Complete the following table by computing the total cost and average total cost for each quantity produced.

Quantity

Total Cost

Average Total Cost

(Pies)

(Dollars)

(Dollars)

1
2
3
4
5
6

The price of a pie is now $11.

At a price of $11, pies are sold in the market. Each producer makespies, so there areproducers in this market, each making a profit of

.

True or False: The market is in long-run equilibrium.

True

False

Suppose that in the long run there is free entry and exit.

In the long run, each producer earns a profit of. The market price is. At this price, pies are sold in this market, and each producer makespies, so there are

producers operating.

Solutions

Expert Solution

Quantity (Pies) Total cost (Dollars)= FC+ (summation of MC)

Average total cost (Dollars)= TC/Q

1 6+1=7 7
2 (7+3)=10 5
3 (10+8)=18 6
4 (18+10)= 28 7
5 (28+12)= 40 8
6 (40+14)= 54 9

The price is $11.

At a price of $11, 200 pies are sold in the market. Each producer makes 4 pies where P=MC, so there are (200/4)= 50 producers in this market , each making a profit of TR-TC= (11)(4)- (7)(4)= $(44-28)=$16 .

FALSE the market in not in the long run equilibrium because in the long run firms earn zero economic profit.

Suppose that in the long run there is free entry and exit.

In the long run , each producer earns a profit of $0 . Because earlier producers were earning positive profits, so therefore new firms enter into the market. The market price is equal to the minimum ATC i.e $ 5.At that price ,total 800 pies (as we can see from the demand schedule) are sold in this market and each producer makes 2 pies (as we can see from the above table where ATC=$5, Q=2) , so there are 800/2 = 400 producers operating.


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