Question

Policy Perspective Suppose the monthly market demand schedule for Frisbees is

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

Quantity demand 1,000 2,000 4,000 8,000 16,000 32,000 64,000 150,000

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

Rate of output 100 200 300 400 500 600

Marginal cost $2.00 3.00 4.00 5.00 6.00 7.00

Average Cost $2.00 2.00 3.00 3.50 4.00 4.50

Finally, assume the equilibrium market price is $6 per frisbee

a. Draw the cost curve 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 the 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