Suppose the following data describe the demand for liquid-diet beverages: Five i
ID: 1222846 • Letter: S
Question
Suppose the following data describe the demand for liquid-diet beverages:
Five identical, perfectly competitive firms are producing these beverages. The cost of producing these beverages at each firm is the following:
(a) What price will prevail in this market?
$
(b) What quantity is produced?
liquid-diet beverages
(c) How much profit (loss) does each firm make?
Instructions: Enter your response as a whole number. Indicate a negative response with a (-) negative sign.
$ per firm
(d) What happens to price if two more identical firms enter the market?
Instructions: Enter your response as a whole number.
Price falls to $
Explanation / Answer
The data has to be tabulated first. Then we first calculate marginal cost, average variable cost and average total cost. After doing this, we need to find a individual firm's supply curve which the rising portion of the MC curve beyond AVC. Multiply each firms quantity by the number of firms (here 5). Now this relation between MC (which is now the price per unit) and the total quantity supplied is the market supply schedule.
PRICE
QS
TOTAL COST
MC=P
FC
VC
ATC
AVC
QS
TR
PROFIT
QS
New TR New Profit
11
5
5
0
10
1
8
3
5
3
8.0
3.0
9
2
10
2
5
5
5.0
2.5
8
3
13
3
5
8
4.3
2.7
15
15
2
21
12
-1
7
4
17
4
5
12
4.3
3.0
20
20
3
28
16
-1
6
5
22
5
5
17
4.4
3.4
25
25
3
35
20
-2
5
6
28
6
5
23
4.7
3.8
30
30
2
42
24
-4
4
7
36
8
5
31
5.1
4.4
35
35
-1
49
28
-8
3
8
45
9
5
40
5.6
5.0
40
40
-5
56
32
-13
2
9
55
10
5
50
6.1
5.6
45
45
-10
63
36
-19
10
67
12
5
62
6.7
6.2
50
50
-17
70
40
-27
Compare the quantity demanded and quantity supplied schedule. There is a unique price level that is equal to the marginal cost and that also equates Qs = Qd. This is the equilibrium price and the resultant quantity is the equilibrium quantity. For this question, the market clearing price is $5 per unit and at this price, a firm supply 5 units. In total it earns $25 as revenue and a total of $22 is spent. So profit earned by each firm is $3.
When two firms enter the market, the production increases. Now multiply each firms quantity by the number of firms (here 7). Again this relation between MC (which is now the price per unit) and the total quantity supplied is the market supply schedule.
Again, compare the quantity demanded and quantity supplied schedule. There is a unique price level that is equal to the marginal cost and that also equates Qs = Qd. The market clearing price after the entry has fallen down from $5 per unit to $4 per unit and at this price, a firm supply 4 units. In total it earns $16 as revenue and a total of $27 is spent. So the loss earned by each firm is $1.
(a) The price that will prevail in this market is $5 per unit
(b) The quantity that is produced in this market by a total of five firms is 25 liquid-diet beverages
(c) The profit that each firm make is $3 per firm
(d) If two more identical firms enter the market, the the price falls to $4 per unit
PRICE
QS
TOTAL COST
MC=P
FC
VC
ATC
AVC
QS
TR
PROFIT
QS
New TR New Profit
11
5
5
0
10
1
8
3
5
3
8.0
3.0
9
2
10
2
5
5
5.0
2.5
8
3
13
3
5
8
4.3
2.7
15
15
2
21
12
-1
7
4
17
4
5
12
4.3
3.0
20
20
3
28
16
-1
6
5
22
5
5
17
4.4
3.4
25
25
3
35
20
-2
5
6
28
6
5
23
4.7
3.8
30
30
2
42
24
-4
4
7
36
8
5
31
5.1
4.4
35
35
-1
49
28
-8
3
8
45
9
5
40
5.6
5.0
40
40
-5
56
32
-13
2
9
55
10
5
50
6.1
5.6
45
45
-10
63
36
-19
10
67
12
5
62
6.7
6.2
50
50
-17
70
40
-27
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