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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The market for apple pies in the city of Ectenia is competitive and has the following demand schedule:

Price Quantity Demanded
$ 1 1,200 pies
2 1,100
3 1,000
4 900
5 800
6 700
7 600
8 500
9 400
10 300
11 200
12 100
13 0

Each producer in the market has fixed costs of $9 and the following marginal cost:

Quantity

 Marginal Cost

1 pie $ 2
2 4
3 6
4 8
5 10
6 12

a. Compute each producer’s total cost and average total cost for 1 to 6 pies.

b. The price of a pie is now $11. How many pies are sold? How many pies does each producer make? How many producers are there? How much profit does each producer earn?

c. Is the situation described in part (b) a long-run equilibrium? Why or why not?

d. Suppose that in the long run there is free entry and exit. How much profit does each producer earn in the long-run equilibrium? What is the market price? How many pies does each producer make? How many pies are sold in the market? How many pie producers are operating?

Subpart (a):

To determine
Calculate total cost.

Explanation

Table -1 shows the demand schedule.

Table -1

Price Quantity demanded
1 1,200
2 1,100
3 1,000
4 900
5 800
6 700
7 600
8 500
9 400
10 300
11 200
12 100
13 0

Table -2 shows the value of the marginal cost and the fixed cost is assumed as $9.

Table -2

Quantity Marginal cost
1 2
2 4
3 6
4 8
5 10
6 12

The total cost can be calculated by using the following formula:

Total cost=Fixed cost+Variable cost (1)

Substitute the respective values into Equation (1) to calculate the total cost.

Total cost=9+2=11

Thus, the total cost is $11.

Table -3 shows the value of the total cost obtained by using Equation (1)

Subpart (b):

To determine
Calculate profit.

Subpart (c):

To determine
Entry to the market.

Subpart (d):

To determine
Long run situation and entry to the market.

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