10. The market for apple pies in the city of Ectenia is competitive and has the

Question

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


Price Quantity demanded
1 1200
2 1100
3 1000
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 this 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 and number of pies each producer makes? How many pies are sold? How many pie producers are operating?

Explanation / Answer

The real answers (submitted and marked correct):

Part A:

1) 11, 11

2) 15, 7.5

3) 21, 7

4) 29, 7.25

5) 39, 7.8

6) 51, 8.5

Part B:

200 pies are sold

Each producer makes 5.

40 producers are there.

$16 profit each producer earns.

Part C:

No.

Part D.

$0 earned in long-run.

$7 market price.

3 pies made by each producer.

600 pies sold.

200 pie producers are operating.

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