Michael Parkin
ISBN #9780133872279
12th Edition
839 Questions
Homework Questions
Perfect competition is a market structure in which many small firms produce identical products with no single firm having market power. Firms are, therefore, price takers and maximize profit by producing where marginal revenue equals marginal cost. In the short run, a firm might earn an economic profit, break even, or even incur losses, but in the long run, the process of free entry and exit drives economic profit to zero. Ultimately, perfect competition leads to an efficient allocation of resources where the equilibrium price reflects both marginal social benefit and marginal social cost, maximizing total gains from trade.
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Lin's makes fortune cookies. Anyone can make and sell fortune cookies, so there are dozens of producers. All fortune cookies are the same and buyers and sellers know this fact. In what type of market does Lin's operate? What determines the price of fortune cookies? What determines Lin's marginal revenue? Use the following table to work Problems 2 to 4 Pat's Pizza Kitchen is a price taker and the table shows its costs of production. $$\begin{array}{cc} \begin{array}{c} \text { Output } \\ \text { (pizzas per hour) } \end{array} & \begin{array}{c} \text { Total cost } \\ \text { (dollars per hour) } \end{array} \\ \hline 0 & 10 \\ 1 & 21 \\ 2 & 30 \\ 3 & 41 \\ 4 & 54 \\ 5 & 69 \end{array}$$
Calculate Pat's profit-maximizing output and economic profit if the market price is (i) $\$ 14$ a pizza, (ii) $\$ 12$ a pizza, and (iii) $\$ 10$ a pizza.
What is Pat's shutdown point and what is Pat's economic profit if it shuts down temporarily?
Derive Pat's supply curve.
The market for paper is perfectly competitive and 1,000 firms produce paper. The table sets out the market demand schedule for paper. $$\begin{array}{cc} \begin{array}{c} \text { Price } \\ \text { (dollars per box) } \end{array} & \begin{array}{c} \text { Quantity demanded } \\ \text { (thousands of boxes per week) } \end{array} \\ \hline 3.65 & 500 \\ 5.20 & 450 \\ 6.80 & 400 \\ 8.40 & 350 \\ 10.00 & 300 \\ 11.60 & 250 \\ 13.20 & 200 \end{array}$$ The table in the next column sets out the costs of cach producer of paper. Calculate the market price, the market output, the quantity produced by each firm, and the firm's economic profit or loss. $$\begin{array}{cccc} & & \text { Average } & \text { Average } \\ \begin{array}{c} \text { Output } \\ \text { (boxes } \\ \text { per week) } \end{array} & \begin{array}{c} \text { Marginal cost } \\ \text { doldiars per } \end{array} & \text { variable cost } & \text { total cost } \\ \hline 200 & 6.40 & 7.80 & 12.80 \\ 250 & 7.00 & 7.00 & 11.00 \\ 300 & 7.65 & 7.10 & 10.43 \\ 350 & 8.40 & 7.20 & 10.06 \\ 400 & 10.00 & 7.50 & 10.00 \\ 450 & 12.40 & 8.00 & 10.22 \\ 500 & 20.70 & 9.00 & 11.00 \end{array}$$