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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.                       

  1. In what type of market does Sam’s operate?
  2. What determines Sam’s marginal revenue of pasta?
  3. 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?
  4. 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?
  5. 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 is operating in perfectly competitive market, because products are identical in nature and there are many sellers with free entry in the market.

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B.

It is the price that determines marginal revenue of pasta, because price = marginal revenue in this type of market.

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C.

No sales takes place. ( no any packet of pasta will be sold)

Because, Sam is price taker seller in this market and he cannot charge a price that is higher to the price that is prevailing in the market.

So, price has to be $5 a packet.

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D.

Sam will not sell at that price of $4.5

Because, market is prevailing at $5 price that will be taken up by Sam.

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E.

It is perfectly elastic demand for Sam's pasta where value of elasticity is infinite (). It makes firm level demand curve to be horizontal in nature. It is different from market demand in perfect competition, as market demand is downward sloping in nature. It means that market demand exhibits elasticity that is not perfectly elastic.

Rahul Sunny answered 1 year ago
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