Question

PRICE (dollars per smoothie); Quantity demanded (smoothies per hour)

1.90 ; 1,000

2.00 ; 950

2.20 ; 800

2.91; 700

4.25 ; 550

5.25 ; 400

5.50 ; 300

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Quantity (smoothies per hour) ; Marginal cost (dollars per additional smoothie) ; Average variable cost (dollars per smoothie) ; Average total cost (dollars per smoothie)

3 ; 2.50 ; 4.00 ; 7.33

4 ; 2.20 ; 3.53 ; 6.03

5 ; 1.90 ; 3.24 ; 5.24   

6 ; 2.00 ; 3.00 ; 4.67

7 ; 2.91 ; 2.91 ; 4.34

The market for smoothies is perfectly competitive.

The top table sets out the market demand schedule for smoothies. Each of the 100 producers of smoothies has the costs shown in the bottom table when it uses its least-cost plant.

The market price $____ a smoothie and the market quantity is ___ smoothies an hour.

(answer to 2 decimal places for the market price.)

The quantity produced by each firm is _____ smoothies an hour. Each firm_______.

A. 7; makes zero economic profit.

B: 8; makes zero economic profit.

C. 7; incurs an economic loss of $10.01 an hour.

D. 6; incurs an economic loss of $10.01 an hour.

Answer 1

It is given that it is a perfect competitive market.In order to maximize profit a firm produces that quantity at which P = MC where P = Marginal cost and P = Price. Thus, P = MC as a function of Q is what we called supply curve, Hence MC curve represents supply curve of a firm.

It is given that there are 100 producers. Let each firm supplies q units. Thus Market supply = Sum of individual supply curve = 100q.

We can see from above that when Price = $2.91 then quantity demand = 700.

As Supply of a perfect competitive firm is given by MC curve i.e. MC curve represents Supply curve.As when MC = 2.91 quantity supplied of a firm = 7 and hence, when MC = 2.9 then Market quantity supplied = 100*7 = 700.

As economy is in equilibrium when Market supply = market demand.

We can see from above that Market supply = market demand when P = 2.9, thus Market price = $2.91 and equilibrium quantity of a market = 700. The market price $ 2.91 a smoothie and the market quantity is 700 smoothies an hour.

As discussed above that It is given that it is a perfect competitive market.In order to maximize profit a firm produces that quantity at which P = MC where P = Marginal cost and P = Price.

Hence P = MC when quantity = 7 => Quantity produced by each firm = 7 units.

Profit = TR - TC

where TR = Total Revenue = Price*quantity of each firm = 2.91*7.= 20.37

TC = Total Cost = Average total cost*Quantity and when Q = 7 then TC = 4.34*7 = 30.38

Hence Profit = TR - TC = 20.37 - 30.38 = -10.01(negative sign suggest that it incurs an economic loss).

Thus, each firm incurred an economic loss of $10.01.

Hence, the correct answer is (C) 7; incurs an economic loss of $10.01 an hour.