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Krugman_SolMan_CH09 - Krugman_SolMan_CH09 4:16 PM Page 79...

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chapter 9 Perfect Competitionand the Supply Curve 1. a. The cappuccino café is probably a price-taking producer, especially if there are a large number of cafés in town, since each will have a small market share and pro- duces a standardized product. b. There is only one manufacturer of Pepsi-Cola, and it works hard to differentiate its product from others in the minds of consumers. It is not a price-taking producer. c. Zucchini sellers at the farmers’ market are price-taking producers; there are many of them, none of whom can affect the market price for zucchini, and zucchini are a standardized product. 2. a. Yes, aspirin is produced in a perfectly competitive industry. Many manufacturers produce aspirin, the product is standardized, and new manufacturers can easily enter and existing manufacturers can easily exit the industry. b. No, Shania Twain concerts are not produced in a perfectly competitive industry. There is not free entry into the industry—there is only one Shania Twain. c. No, SUVs are not produced in a perfectly competitive industry. There are only a few manufacturers of SUVs, each holding a large market share and SUVs are not a standardized product in the minds of consumers. 3. a. From Kate’s variable cost ( VC ), the accompanying table calculates Kate’s total cost ( TC ), average variable cost ( AVC ), average total cost ( ATC ), and marginal cost ( MC ). 79 b. Kate’s break-even price, the minimum average total cost, is $19.33, at an output quantity of 30 meals. Kate’s shut-down price, the minimum average variable cost, is $15. c. When the price is $21, Kate will make a profit: the price is above her break-even price. And since the price is above her shut-down price, Kate should produce in the short run, not shut down. d. When the price is $17, Kate will incur a loss: the price is below her break-even price. But since the price is above her shut-down price, Kate should produce in the short run, not shut down. e. When the price is $13, Kate will incur a loss: the price is below her break-even price. And since the price is also below her shut-down price, Kate should shut down in the short run. Quantity MC AVC ATC of meals VC TC of meal of meal of meal 0 $0.00 $100.00 $20.00 10 200.00 300.00 $20.00 $30.00 10.00 20 300.00 400.00 15.00 20.00 18.00 30 480.00 580.00 16.00 19.33 22.00 40 700.00 800.00 17.50 20.00 30.00 50 1,000.00 1,100.00 20.00 22.00 Krugman_SolMan_CH09 11/11/04 4:16 PM Page 79
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