Econ problem set 3

# Econ problem set 3 - b The market price of pizza increases...

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Bryan Baum Problem Set No. 3 1. See paper 2. The firm’s profit maximizing quantity is where Marginal Cost= Marginal Revenue this is at a quantity of 4. 3. Since the firm is a price taker people will continue to want to buy the widgets for their usual price of 6\$. The firm will incur an additional cost of 2\$ because they would now have to sell the widget’s at a price of 4\$ to meet the market price of 6\$. The marginal cost per widget would increase by 2\$. The profit maximizing output would now drop to 3 output because it is the new point at which marginal cost= marginal revenue. Part 2. 2. a. In the short run the total quantity of pizza sold in the U.S. decreases because the supply curve in the market shifts to the left.
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Unformatted text preview: b. The market price of pizza increases because the market equilibrium shifts up due to the 20 cent sales tax. c. Renato’s output is decreasing because it is a price taker and it has to remain at the same price while the marginal cost increases. So it must shift it’s profit maximization quantity down. d. Renato’s now is facing a loss as seen in the graph. 3. a. The total quantity of pizza sold in the long run will decrease because firms will leave the market because they are not making economic profit. b. The market price of pizza increases. c. Renato’s output stays the same it goes back to q1. d. The number of pizza parlors in the U.S. decreases....
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