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. Assume the price of a pie is $10. 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?

Explanation:

A.) Answer to question A is attached.

B.) The price of the pie is $10 according to the question. Please note that in a competitive market, a firm produces that level of output at which price equals MC. I.e P = MC. Where there is no such output, then it will produce up to the level in which P>MC.

Therefore, price(P) is equal to MC, P = MC up to the production of 5 pies.

So, producers in the market = 300 ÷ 5

= 60.

Profit = ( 5 × 10 ) - ( 5 × 7.8 )

= 50 - 39

= $11

Therefore, at a price of $10, 300 pies are sold in the market. Each producers makes 5 pies, so there are 60 producers in the market, each making a profit of $11.

C.) In a competitive market, and in the long run, price = minimum ATC.

Here, the minimum ATC is $7, but the price is $10.

The above means that the market is not in the long run equilibrium because price (P) is not equal to the minimum ATC. Thus in the long run, more firms will enter the market until the price equals ATC.

D.) Producers operating = 600 ÷ 2

= 300

It therefore means that in the long run, each producer earns a profit of $0. The market price is $7, while at this price, 600 pies are sold in the market, and each producer makes 2 pies , hence there are 300 producers in operation.

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