Question

how do I solve problem # 10 in chapter 6 of the Essentials of Economics 10th edition by Bradley R. Schiller? DO I need to make 2 graphs?

10. POLICY PERSPECTIVES Suppose that the monthly market demand schedule for Frisbees is

Price $8 $7 $6 $5 $4 $3 $2 $1

Quantity demanded   1,000   2,000   4,000   8,000   16,000   32,000   64,000   150,000
Suppose further that the marginal and average costs of Frisbee production for every competitive firm are
Rate of output Marginal cost: 100 200 300 400 500 600

Marginal cost $2.00 $3.00 $4.00   $5.00 $6.00 $7.00

Average total cost $2.00 $2.50 $3.00   $3.50 $4.00 $4.50

Finally, assume that the equilibrium market price is $6 per Frisbee.   LO5
(a) Draw the cost curves of the typical firm.

(b) Draw the market demand curve and identify market equilibrium.

(c) How many Frisbees are being sold in equilibrium?

(d) How many (identical) firms are initially producing Frisbees?

(e) How much profit is the typical firm making?

(f) In view of the profits being made, more firms will want to get into Frisbee production. In the long run, these new firms will shift the market supply curve to the right and push the price down to minimum average total cost, thereby eliminating profits. At what equilibrium price are all profits eliminated?
(g) How many firms will be producing Frisbees at this price?

Answer 1

(a)

The cost curves for the typical firm is given below+

b)

The market demand and price is given below

At market equilibrium P=6 and Q=4000 (point E1)

c)

At equilibrium there are 4000 freesbies being sold.

d)

At equilibrium the price taker competitive firm produces the output for which P=MC. In this case P=MC=6. At this level a typical firm produces 500 units of output. The total market supply is 4000 units. Therefore, the number of firms producing freesbies (n) is

e)

At the output level of 500, the average total cost of production is ATC=4. Then per unit profit of a typical firm is P-ATC=$2. For 500 units the total profit is

f)

As new firm enters the market the price began to fall. The firm continue to enter as long as P>ATC. At long run P=ATC=MC. This occurs at P=ATC=2.

g)

A typical firm produces q=100 at this price, p=2. The total market demand is Q=64000. Then the number of firms is