Chapter 8, Problem 2TY

Profit is the incentive that drives our market economy. Firms make production, pricing, and hiring decisions based on their quest for profit. But what happens when a firm discovers that it can make dramatically higher profits by stopping production altogether? In December 2000, due to wild swings in the market for electricity, Kaiser Aluminium faced just such a decision.  Kaiser Aluminium had contracted with Bonneville power for all of its electricity needs and found itself in the unique position of being an electricity consumer and, potentially, an electricity reseller. By December 2000, Kaiser faced a difficult decision of continuing its current aluminium production and profit levels, or closing the plant to dramatically increase its profit by simply reselling its electricity.  When making production decisions, firms must consider both their costs and revenues. One important concern for many firms is utility costs. In 1996, Kaiser Aluminium Corporation in Spokane, Washington, entered…

Consider the following perfectly competitive market for oranges:   Qs = 5P   Qd = 60 – 5P   Now suppose that demand for oranges increases by 20 units at each price. After the increase in demand, which of the following is correct?   Group of answer choices   a The equilibrium price is unchanged, and the quantity traded increases by 20.   b The equilibrium price increases by $2, and the quantity traded increases by 20.   c The equilibrium price increases by $2, and the quantity traded increases by 10.   d The equilibrium price increases to $8, and the quantity traded decreases to 40.

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?