Question

Suppose that the monthly market demand schedule for Frisbees is

Price	$8	$7	$6	$5	$4	$3	$2	$1
Quantity Demanded	1000	2000	4000	8000	16000	32000	64000	150000

Suppose further that the marginal and average costs of Frisbee production for every competitive firm are

Rate of Output	100	200	300	400	500	600
Marginal Cost	$2	$3	$4	$5	$6	$7
Average Total Cost	$2	$2.5	$3	$3.5	$4	$4.5

Finally, assume that the equilibrium market price is $6 per Frisbee.

1. Draw the cost curves of the typical firm and identify its profit-maximizing rate of output and its total profits.

2. Draw the market demand curve and identify market equilibrium.

3. How many Frisbees are being sold in equilibrium?

4. How many (identical) firms are initially producing Frisbees?

5. How much profit is the typical firm making?

6. 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 average total cost, thereby eliminating profits. At what equilibrium price are all profits eliminated? How many firms will be producing Frisbees at this price?

Answer 1

A & B

c.

At $6 per Frisbee, market equilibrium is 4,000 units.

d.

Since there is an equilibrium quantity sold of 4,000, there is room for eight firms who are each producing 500 Frisbees.

(E)

Profits of a typical firm are ( 3000 - 2000 ) = $1,000.

total revenue = 500* 6 = $3,000.

total cost =  500 *  $4 $2000.

(F) .

The long run price equals the minimum ATC, price would be $2 , at which point economic profits will equal zero.

total revenue= 64,000 *2= 128000

total cost 64000*2 = 128000 profit = 128000-128000= $ 0

at this ATC rate of output is 100 units. so no of firms in the long run are

64000/ 100 = 640 firms .