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In: Economics

Sam’s pasta is identical to the pasta made by dozens of other firms and there is...

Sam’s pasta is identical to the pasta made by dozens of other firms and there is free entry in the pasta. Buyers and sellers are well informed about prices.                      Points: 5                                                                               

  1. In what type of market does Sam’s operate?
  2. What determines the price of pasta?
  3. What determines Sam’s marginal revenue of pasta?
  4. If pasta sell for $5 a packet and Sam offers his pasta for sale at $5.50 a packet, how many packets does he sell?
  5. If pasta sell for $5 a packet and Sam offers his pasta for sale at $4.50 a packet, how many packets does he sell?
  6. What is the elasticity of demand for Sam’s pasta and how does it differ from the elasticity of the market demand for pasta?

Solutions

Expert Solution

a) Sam’s operate under a perfectly competitive market as Sam’s pasta is identical to the pasta made by dozens of other firms and there is free entry in the pasta and buyers and sellers are well informed about prices. These are the characteristics of a perfectly competitive market.

b)Under perfect competition price is determined by the market. Price of pasta is determined by the interaction of the market demand and market supply curve. Price is fixed at the point where market demand curve intesect the market supply curve. Individual firms then has to adopt the price determined by the market as firms are price takers under perfect competition.

c) Sam’s marginal revenue of pasta is determined by the price of pasta as under perfect competition marginal revenue equals average revenue and price. This is because Sam will always get the same price for every unit it sells regardless of the number of units of pasta Sam sells as firms are price takers and individual firms cannot affect industry price.

d) If pasta sell for $5 a packet and Sam offers his pasta for sale at $5.50 a packet, Sam will not be able to sell any pasta packets. In this market there are large number of firms selling identical product and buyers and sellers are well informed about prices. So if Sam increase his price above the market equilibrium level, he will lose his customers to his competitors and will not be able to make any sales.

Rahul Sunny answered 2 years ago
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